Budgeting 101: Basics For Building a Brilliant Budget

Creating a budget that works for you is like discovering a secret to financial control. It gives you complete authority over your money, allowing you to know exactly where every penny goes. You no longer have to live paycheck to paycheck, hoping you’ll make it through until the next one, nor do you need to rely on credit cards to get by. With a solid budget, you’re not just surviving; you’re thriving. It brings financial discipline, helping prevent overspending, especially when unexpected costs pop up. A budget also helps you set aside money for future investments and long-term goals, ensuring financial security. It empowers you to make informed decisions, avoid debt, and adjust to life changes, whether it’s a new job or rising expenses. By sticking to a well-planned budget, you’re not only achieving financial stability but also enjoying the peace of mind that comes with knowing you’re in control of your finances. Let’s explore the ins and outs of creating a working budget.

What is a Budget?

Budgeting involves creating an estimate of your expenses over a specific period, such as a month or a year. It helps you organise your finances by allocating money to different categories, including essentials like household expenses and groceries, savings, and non-essential expenses like entertainment. By maintaining a clear understanding of your financial status, a well-planned budget enables you to prioritise your spending, save for future goals, and make informed financial decisions. This continuous process ensures better control over your money, helping you avoid overspending and achieve long-term financial stability.

Key Terms to Know:

• Money earned (Income): This is what you make. It can come from your work, allowance, or support system
• Money spent (Cost): This is amount you use to pay for things, food, clothing, and leisure.

Money saved (Savings): This is the money you set aside for future use. You don’t usually spend it on regular basis but kept it for emergencies, big purchases, or investments to help your money grow over time.

Why Do We Need a Budget?

There are several reasons why it is important to have a budget.

1. Keep Your Expenditure in Check

A budget reveals the pathway your rupees travel. You can identify the areas where your spending is out of control and minimise it to pay for the stuff that’s really necessary.

2. Put Something Aside for Tomorrow

A certain amount each month should be reserved for savings. They’re not just for emergencies but to do small investments in instruments like Fixed Deposits and Recurring Deposit.

3. Building a Secure Future by Achieving Financial Goals

You have goals, and some of them might require the kind of immediate funds that a budget could help you with. When you get a hang of your day-to-day finances, you have the freedom to pursue the matters in your life without constantly thinking about money management.

4. Building a Budget to Shape Your Ideal Lifestyle

Proper budgeting helps you to work towards the kind of lifestyle you want to pursue.

How to Create a Budget?

Developing a budget is pretty simple. You just need to look at your income, expenses and goals.

We have used an example of a typical middle-class family with an income of ₹50,000 to give you an understanding.

Step 1: Know Your Income

Look at all the funds you receive on a monthly basis. This comprises:

• Regular pay from your job (Salary)
• Interest earned form the rent, investment, etc.
• Income from part-time gigs or freelance projects (passive income)

Step 2: List Your Expenses

There are 2 kinds of expenses: Fixed Expenses and Variable Expenses. Fixed expenses are the same every month and Variable expenses keep changing according to various factors like inflation.

1. Fixed Expenses (Same Every Month)
   1. Rent / Home Loan EMI
   2. Education (School Fees)
   3. Insurance Premiums
   4. Utility Bills
2. Variable Expenses (Change Every Month)

Variable expenses are costs that can change every month. It depend on how much you use something or outside factors. Unlike fixed expenses, which stay the same, variable expenses can go up or down. For example, your spending on things like food, gas, or entertainment can change depending on how much you buy or what happens unexpectedly.

1. Groceries
2. Outings
3. Transport

Regular payments are necessary and can’t be avoided. They are part of the monthly expenses and must be planned for before the due date.

Once you are aware of all your monthly expenses, the best thing to do is to create a list. Below is a basic table that can assist you with that task:

Step 3: Compare Income and Expenses

Next, take your total expenses and subtract them from your income. This will tell you whether you’re living within your means or piling up debt.

In This case,

Total Income – Total Expenses

₹50,000 – ₹30,000 = ₹20,000

The remaining amount can be invested or put in a savings account.

Step 4: Adjust Your Budget

If you discover that you’re spending too much, it’s time to make some changes. Here are several strategies to save money:

• Eliminate Unwanted Costs: Examine your list of costs and identify any that you can forgo, such as an additional snack or a movie ticket.
• Establish Saving Goals: Determine a monthly amount that you wish to set aside, and stick to the figure.
• Use Physical Currency: Spending in cash allows you to see exactly how much you’re spending, making it less likely for you to overspend.
• Use Budgeting Apps: Tracking your expenses is a great habit for maintaining a budget. Several apps are now available on the App Store or Google Play Store that help you review your expenses weekly with your family for better results.
• Budget Masons Concept: Break down budgets into categories like groceries, utilities, savings, etc., and track each category as a family challenge.
• Set Rewards for Goals: Celebrate meeting savings goals with treats like a family outing, a nice dinner, or a small gift—something everyone enjoys.

Creating a budget helps you manage your finances by giving you a clear picture of your expenses and future earnings. Remember, it’s never too late to start a budget that works for you!

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.