Budgeting Basics: How To Save Money and Reach Your Goals | How to make a budget to achieve your financial goals

You must have seen governments or companies making budget for each financial year or you may have heard people talking about budgeting. But what is it? What is its use? And why you should prepare a budget? I will answer all your queries in this article.

What is Budgeting?

Budget is a tool for planning, coordinating and controlling your expenses for achieving long term goals. The process of making this plan is called budgeting. Making a budget enables you to determine what steps you need to take to achieve your goals and prevents you from over-spending.

Budgeting is about controlling your finances, but only to the extent that it doesn't start feeling like a punishment. Your budget need not be rigid. An ideal budget should be flexible and adapt to any changes in circumstances. It should be customizable, with enough room for adaptation.

Importance of Budgeting:

1. Budgeting helps you in understanding your relationship with money. Budget helps you in regular tracking of your expenses, which helps you to spot patterns of your spending and make changes if required. Overall, it helps you in avoiding unnecessary expenses.

2. A budget should include targets for emergency funds, along with investment. This will allow you to be in discipline and strategize different ways to save more and complete the targets, therefore securing your future.

3. A budget helps you in identifying unnecessary expenses and hence reduces overspending, which prevents you from taking frequent debts.

4. Budget helps you in managing your financial decisions and preparing for the challenges, and hence ensures financial independence in future.

5. Budgeting helps you in forecasting those periods/months where you have tight finances (more expenses) and ones with extra liquidity (where you can be flexible in saving).


How to Make a Budget?

Making a budget is easy. You can do it in seven simple steps:

1. Calculate Your Net Income: Write down your average income from each source, and add them to get the "Net Monthly Income". This is the amount, which you have to manage and spend the whole month.

2. Differentiate between Needs and Wants: Needs are necessary expenses, which you can't avoid, but Wants are unnecessary expenses, which you can avoid to save more money.

3. List Monthly Expenses: Write down all the necessary expenses, which you spend every month. For example, school fees, house rent, EMIs, transportation costs, etc.

4. Sort out fixed and variable expenses: Out of those expenses which you listed, some may be fixed, and some may vary according to situations. For example, school fees, house rent, EMIs are fixed, their amount is not going to change. Whereas expenses like transportation cost is variable, it depends on how much you travelled. The list of fixed expenses will show you the non-negotiable expenses, which you have to spend anyhow. But the list of variable expenses show you the expenses, which you can adjust and save more.

5. Write the average monthly cost of each expense: Write down the average amount of each expenses (both fixed and variable), and add them to get the total average monthly expense. Now, you will get an idea of the maximum amount which you can save in a month.

6. Follow the 50-30-20 rule: Now when you have an idea of all your income and expenses, allot 50% of your income to your Needs, 30% to your Wants and 20% to Savings (for achieving your financial goals).
Remember, you need not to follow it strictly. Keep it flexible. You can adjust the ratio according to your own Needs, Wants and Financial Goals.

7. Make adjustments: After you make your budget, try to implement it, and track your expenses and cash flow. If you think there's something which you should improve, then make adjustments. This will make your budget flexible, and you'll not feel any unnecessary pressure.


How will budget help in saving money and reaching your goals?

After reading this article, I think you can answer this question now.
Budget will help you in tracking the expenses and cash flow, which will give you whole idea of what adjustments you should do, what lifestyle you should adopt, what type of investment you should do, and how you can increase the cash flow. And all of this will help you in maximising your income, minimising your expenses and hence save more and more money.


That was all about budgeting.
By following these strategies, you'll be able to make your own budget, and increase your savings.

For more such tips on personal finance and investment, keep visiting this blog!