In may last article, we had discussed the meaning, characteristics and advantages of a personal budget. A personal or a family budget is absolutely essential in managing your finances. It becomes all the more essential in the current economic scenario, where each rupee that you earn is stretched to its maximum.
In this article, we will discuss the basic tips and guidelines to prepare a successful budget. So, what is a successful budget? A successful budget is one which helps you to achieve your financial objectives, whether long-term or short-term. How to make a successful budget? Well, read on:
1) Determine your time frame: Fix a time-frame for your personal budget. What is the time-period that you want to cover with your budget: a month, three months(quarterly), six-months (half-yearly) or 12 months(i.e., an yearly budget). The best time frame for a family budget is one month, that is, it should be prepared monthly.
2) List down all your incomes: If you are a salaried person, the total income will be your take-home salary. If both you and your your spouse are working, then you can add your salaries to reach a total figure. If you are a self employed business-person or a professional, add your realized incomes from all the sources.
3) List down all your expenses: Make a list of all your expenses. Note down major expenses like rents, school/college fees, loan installments, insurance premium etc. Some items like insurance premium may not fall due every month. Still, it is prudent to allocate a sum every month for it. Some smaller items like groceries, conveyance, utility bills etc can be lumped together under a single head.
4) Follow the “60%” Rule: This rule states that all the expenses should not exceed 60% of your income during the specific time frame. If the expenses exceed this ballpark figure of 60%, it is a good idea to rationalize your expenses. The remaining 40% of income should be allocated as: 10% for long-term savings and investment, 10% for short-term savings, 10% as emergency fund maintained in cash, and the remaining 10% to be spent on entertainment and recreation.
5) Keep a written record: Putting down something on paper generally commands a greater commitment. Write down all the above figures on paper. Maintain the records of all income receipts and expenditures. It would be better if you earmark specific days and time that you will devote for this activity.
6) Review: Flexibility is one of the biggest hallmarks of a successful family budget. Do not hesitate to review the budget periodically, and make necessary course corrections. Check whether any item of expense needs a revision, or whether you can just let go of a particular expense without a considerable impact.
7) Stick to your Plan: A best laid personal budget is useless if the plan is not followed. Therefore, inculcate the necessary financial discipline in yourself to follow the plan to the hilt. It will be difficult at first, but then Rome was not built in a day! With enough practice, you will start following your plan, Why, you may even start enjoying the making and following a personal budget!
To conclude, I will reiterate that an accurate and realistic budget is the primary requisite, the sine qua non of successful personal finance planning. It helps to allocate the necessary money for all your expenses, save for emergencies, for fun and entertainment, and also for long term savings and investment. You do not need the services of a financial wizard to make a successful family budget. Just a little time, patience and commitment from your part will do the trick.