Circa 2000 – my girlfriends and I finished our professional degrees and, in the new liberalised economic environment, found ourselves in jobs that started to pay us salaries that were far fancier than our pocket monies or what our parents (mostly fathers) made at that time. That also meant, for the longest time, whatever money we made we spent on ourselves.
The early years of marriage meant either the household had double income or the husband earned enough. My working/non-working friends who weren’t married lived with their parents and they never felt a compelling need for budgeting also. There was always money for holidays, eat-outs, shopping and home bills.
Until real adulting happened!!
We decided to start a family, hire more help, buy a bigger car and invest in a house. It all came pouring down together. Suddenly, I wondered where all the money we had earned was. Why were there so many things in the house – why had I spent so much on impulsive buying and had things I barely wore or used? Why were our grocery bills and eating-out bills almost equal? Why did I have so many products in my kitchen beyond the expiry date? Till I realised, that despite earning well all these years I had never followed any budgeting and now it was smacking me in the face.
Everyone knows the definition of budgeting. But how many of us diligently budget? They say that most homemakers are the best budgeting experts, even then, the struggle is real and starts rather late in life. Imagine if we learnt budgeting in childhood.
Women, especially, find all kinds of reasons to avoid budgeting.
“I find it overwhelming to keep track of every single penny,”
“I don’t earn enough to budget,”
“I make good money, I can afford my lifestyle,”
“Ghar chal hi jata hai,”
“Budgeting is my husband’s job,”
“I can do budgeting in my head.”
Why is Budgeting Important
Budgeting is the most basic and important financial habit one should develop as soon as they start handling money. Simply put, budgeting just doesn’t help in tracking our finances but also helps in understanding our spending habits, and our relationship with money and guides us in utilising that money more responsibly. Most often people budget to save and invest or to ensure they are not drowning under credit card debts.
I remember how one of my friends at 33 was the first in our group to buy her own house. She was living with her parents, which meant there were no outgoings. She could have happily spent all the money on herself but budgeting allowed her to make room for the monthly instalments.
Basic Principles of Budgeting: Needs, Wants & Desires
Simply explained, budgeting is making a spending plan based on income and expenses. It involves putting on paper all sources of income, cutting tax on them and then dividing your spending into three distinct buckets: Needs, Wants & Desires.
Under needs, you put all your essential spending into your fixed costs. Like rent, bills, childcare, house help, basic transport, clothing, food, insurance, instalments, etc. These are non-negotiables – that ensure health, safety and comfortable living for your family. This bucket should always have some room for miscellaneous/unforeseen expenses.
Then comes the want list that includes expenses that you can comfortably live without but they add to your overall well-being. You want to socialise with friends, go on a vacation, plan birthdays, enrol for a class, etc.
And finally comes the list of things you desire, things we put in an aspirational shopping bucket.
Putting your needs in these three buckets ensure that you are mindful of spending the money and can prioritise your spending.
Popular Budget Methods
The 50/30/20 rule for personal finance and budgeting seems the most popular one amongst most people. The rule asks you to allocate 50% of your post-tax income towards your needs, 30% towards wants and 20% towards savings. This percentage varies from income to income and you can come up with your own budget rule based on your life circumstances and outflows.
Goal Setting Approach
When you start budgeting you realise that irrespective of how much you earn, you can make solid financial goals. The Reverse Budgeting method is based on the principle that right at the beginning you set aside the money that you need for a certain goal and then use the remaining money to spend on your needs, wants and desires.
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Every Penny Accounted Approach
As the name suggests this approach requires you to plan out all your expenses as accurately as possible and put every single penny under a subhead. It is a tougher and tighter way of budgeting where you have to ensure that if you have overspent under one then you must compensate in the other.
On The Fly Budgeting
People with better impulse control follow this method, where they always keep an eye on their account/s, do not use credit cards until necessary and make forced savings with SIP (Systematic Investment Plans).
Whatever your method you must inculcate this habit right from the very start. In these times of cashless transactions, e-commerce available at fingertips, fast fashion and supermarketing, impulsive buying can become an easy trap. Budgeting just ensures you are aware of what your money is doing for you.
Disclaimer: Reach out to your financial advisor for a better understanding of your risk management needs and investment tools.
The article is published in collaboration with BSE Investors’ Protection Fund to spread awareness with respect to personal finance and investing, especially for women.