Roles of budgeting in personal life or business life

K. Davidraja Eastern University

What is budgeting?

Budgeting in a business sense is the planned allocation of available funds to each department within a company. Budgeting allows executives to control overspending in less productive areas and put more company assets into areas which generate significant income or good public relations. Budgeting is usually handled during meetings with accountants, financial experts and representatives from each department affected by the budgeting.

In a personal financing sense, budgeting can mean estimating monthly living expenses based on previous bills and wages. If your monthly income is a steady Rs. 30,000 for example, you can subtract all of your known monthly bills from that figure even before they arrive. Some bills can be estimated and subtracted from the original income figure. The remaining balance after fixed expenses now becomes your household budget. Instead of assigning dollar amounts for sundries such as groceries, entertainment, gas and clothing, budgeting allows you to use percentages instead.

Personal budgeting

Having a carefully planned personal budget in place can make a difference between being in control of your finances and being controlled by your finances.

When you are in control, you:

1. Know how your financial outlook will be for the next 3, 6, 12 months or even longer.

2. Know where your money is coming from and how your money is going to be used.

All successful companies and wealthy people have their own budgets. If you want to be successful then you need to have a financial plan as well.

Benefits of budgeting

The most important reason for having a budget is because,

“A budget can help you achieve your dreams.”

Having a carefully planned budget and sticking to it is a tried and tested way of achieving dreams. Millions of people have done it.

Here are some common benefits of having a budget.

* You become aware of your income and spending habits.

You will learn where your money comes from and where they go to.

* You take control of your finances. o You decide where and how you spend your money.

By planning ahead, you will not worry about whether you have enough money to last until your next paycheck.

You learn to control or cut out unnecessary expenses.

* Allows you to take advantage of opportunities.

By knowing your exact financial position, you can decide to take advantage of opportunities that you might otherwise miss. You will never wonder if you could afford something.

* You free up extra money.

If you plan your budget properly, you can do away with hidden fees, penalties and interests on late payments. This will result in extra money for you to use for other purposes.

* Communication tool.

A budget is a good tool to communicate financial information to your family and to resolve any personal differences which might arise.

By involving your family in the budgeting process, everyone will get a chance to put forward their priorities, understand and compromise to come up with a budget.

Budgeting, a step-by-step guide

A budget is a tool to help you achieve your dreams. Without dreams and goals, you will not be able to come up with a meaningful budget because your budget does not have a purpose.

Assessing your current financial health

Knowledge is power. And by understanding your current financial health, you can avoid surprises. You will also be able to plan your budget more effectively when you understand your money habits.

Planning your budget

This budget is your master plan. You will plan how to use your money so you can achieve your goals. This plan can range from short term (a few months) to long term (a few years).

Walking through and revising your budget

Budgeting is not just about numbers. It is also about your lifestyle. You need to feel comfortable with your budget. If not, then revise it.

Tracking your budget

Keep track and review your budget. Do this on a periodic basis, for example half yearly review.

This helps to keep you motivated when you see progress. Circumstances may have changed since the last time you planned your budget and a review will keep your budget more relevant to your current situation or goals.

Sticking to your budget

A budget is a long term commitment. It is a commitment until you achieve the goals of the budget. It takes a lot of self-discipline to stick to the budget day after day.

Change your lifestyle, adopt new habits

The first few weeks of following your budget are usually the most uncomfortable. During this period, you will need to adjust to your new lifestyle for example packing lunch, taking the bus and others.

Also, you might unconsciously break your budget because of your old habits, for example buying cigarettes when you promise to quit smoking and save on cigarettes money.

The key is to change your lifestyle and pick up the new habits. As time passes, you’ll feel more comfortable and you will automatically spend within your budget.

Keep records

Keep a record of what you spend on. File all the receipts that you get. At the end of every week, add up what you’ve spent and check that you are still within your budget and be aware of how much balance is still available to spend on for your different items.

At the end of every month, add up your expenses and track it to your budget. If you’ve spent less than your budget then great! If you’ve spent more than your budget, then focus on those items where you have overspent and keep monitoring your spending.

Remember your dreams

The best way to adjust and remind yourself to follow your budget during this early stage is to write down your dreams on a piece of paper. Then put the paper where it is easy for you to see it. In my opinion, the best place to put this note is the place where you look at before you spend your money. Your wallet is a good example. If you buy online, then stick a note on your computer screen. Seeing the note will discourage you to buy something that’s not in your budget.

Eventually, you will develop a mental awareness whereby before you make any spending decisions, you will question yourself whether your decision will bring you closer to your goals.

Staying motivated

Naturally, after some time the hype and motivation will dwindle and that is when people find it difficult to stick to their budgets. Fortunately, there are ways to bring you back on track.

Answer to someone. Some people perform better when they have to answer to someone. If you find yourself always slacking in your budget, then this might just be your solution. Share your budget with someone you can trust, someone you’ll feel comfortable with knowing your finances. Go over your budget and expenses with this person once a month. Have them make you answer for items where you have overspent.

Sometimes, having to answer to someone makes sticking to your budget so much easier.

Inspire yourself. When you feel tired or you feel that the journey is tough, then read some materials such as inspirational quotes, articles, true stories.

Revising your goals

If you have cut down on your spending to the minimum and you still cannot free up enough extra money to save for your goals, then you need to find ways to increase your income.

However, if you can’t increase your income any further, then you should review and revise your goals. You should always look for ways to increase your income first before revising your goals. The reason being you want to come up with a budget to achieve your goals and dreams. Not come up with goals to suit your budget.

Postponing your goals

You can postpone your goals. This will lower your monthly savings amount.

Example: revising goals.

Clear credit card debt of Rs. 15000 in 6 months.

Monthly savings needed: Rs. 15000 / 6 = Rs. 2500 a month after cutting down my spending and have no way to increase my income, I can only save up to 1000 a month.

Prolonging my goal from 6 months to 15 months.

Monthly savings needed: Rs. 15000 / 15 = Rs 1000 a month

In the example above, I have lowered down my savings needed to achieve my goal and therefore I have a working budget.

By postponing your goals, you will take a longer time to achieve your goals. However, this is still better than not having a working budget. When you have a working budget, you become motivated, dedicated and confident.

Prioritizing your goals

Look at your list of goals. Are there any unimportant goals that you have put inside the list? Could you have given yourself too many goals, therefore stretching your budget too much?

Removing the less important goals will lower your monthly savings and move you closer to a working budget. With less goals, you can dedicate more energy and time into achieving the goals more important to you.

Overall, considering all the above, it should not be an exaggeration to say that budgeting will help you sleep in peace because with it by your side, you no longer will have financial worries that would otherwise have kept you awake.