We live in uncertain times when you may suddenly face a financial emergency. Such a situation may call for you to spend a lot of money. That’s when your savings will help you. But what if you have no savings? You will then end up in trouble.
If you haven’t saved money, it is time to get started. If you are saving, but not able to do it consistently, then you need a plan. We have a guide for you that tells you all about budgeting and saving money. Follow this guide and put your finances in order, so you start saving for the future.
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Basics of Budgeting
Just as the government has a budget that explains how they intend to spend money, you also need a budget. The budget will tell you how much money you are going to earn, how much money you will spend, and how much money you can save. The budget is a financial plan for the future.
Budgets are usually made for the next year. You can even make half-yearly or quarterly budgets. Before you start budgeting you need to get complete information on the incomes you will earn for the year (salary, bonus, commission, interest, dividend, etc.) You also need to know the complete expenses for the year. This includes mortgage, loan repayments, insurance, utility bills, food bills, entertainment expenses, travel expenses, education expenses, etc.
It is fine if you cannot get the exact data. You need to estimate your income and expenses based on the previous year’s data. For example, you may expect to earn 10% more the next year. With inflation being a problem, you may expect prices to go up significantly. You need to estimate for it.
You can do the budgeting yourself or get the help of a financial planner (who will charge a fee but do a professional job). You can budget on paper or using a worksheet like Excel. There are websites and apps that offer you templates to make budgeting easy.
Start with 50:30:20
There are different ways of budgeting. For most people, the 50:30:20 principle of budgeting would be a convenient way to budget. This is how it works:
- You spend 50% of what you earn on your needs. The needs include:
- Groceries.
- Rent or mortgage.
- Utility payments.
- Insurance.
- Transportation.
- Child care.
- Clothes.
- Loan repayment.
- 30% of your income can be spent on wants. The wants include:
- Dining out.
- Vacations.
- Trips to the cinema or malls.
- Entertainment expenses.
- Spa services.
- The balance of 20% should be invested as savings.
Let’s look at each of these in detail.
Spending on needs
Needs are essentials that you absolutely need. You cannot eliminate them. For example, you must pay your energy and phone bills. You have to make insurance and loan repayments. However, if you are spending too much then you can try and reduce on groceries, and transport, and even consider moving to a less expensive home.
If it is absolutely impossible to balance your budget, you may need to cut down on your wants and use that money to spend on your needs. The other option is to increase your income. Taking up part-time work in the evenings or weekends or doing freelance work is an option.
Managing wants
Wants are not essential, they are what you desire. If you are not able to budget then you may need to cut down on wants. Reduce eating-out expenses. Since you have streaming on mobile, do away with cable TV. In this way, try to reduce expenses on wants until you are able to manage your finances better. Some sacrifices now will help you lead a better life tomorrow.
Saving for the future
If you are not left with any money to save, then you are in trouble. You then need to seriously relook at your budget to try and earn more or spend less. 10% to 20% of your earnings must be saved. Here are some tips to help you save money.
- First, create an emergency fund with at least 3 months of expenses. This money should not be used and kept aside for an exigency.
- Invest in 401K (retirement savings) and try to get your employer to match your savings. This will help you save for the future.
- Consider investing in mutual funds or shares. This will help you earn more. However, the risks are more.
- When you earn extra money, don’t spend it. Use it to clear debts or save for your retirement. This will help you manage your finances better.
