Proven Budgeting steps to secure Financial Freedom
You have seen people making monthly household budgets. Even you have seen your parents doing it. In India, every middle-class family have their monthly budget ready in the first week of the month. You have tried making a budget before coming to this blog and you are confused too Right?
In this blog, we have tried implementing some practical ways in which you can manage your money.
What is Budgeting and Why is It Important?
The most common definition of budgeting is “tracking of expenses” but budgeting is not limited to tacking. It includes the discipline of money, planning expenses, and strategising investment. Now let’s see how good budgeting can help us in our lives.
– Helps avoid overspending and accumulating debt.
– Assists in saving for future goals (vacation, home, retirement).
– Provides financial peace of mind.
– Encourages better spending habits.
– Allows tracking progress toward financial goals.
Step-by-Step Guide to Creating a Budget
Creating a budget might seem daunting at first, but breaking it down into steps makes it much more manageable.
- Identify Your Income
The first step in budgeting is to know how much money is coming in. To track all your income from different sources you can maintain one bank account for all your income just put that bank account from wherever you expect the income. It will reduce the hassle of tracing your expenses from different sources.
Having a clear picture of your total income is crucial for planning how much you can afford to spend and save.
Tip: Keep one bank account for all your income sources. Don’t spend from this account.
- List Fixed and Variable Expenses
Once you know your income, list all your major monthly expenses. These can be categorized into two types:
– Fixed Expenses: These are regular payments that are typically the same every month. Rent/mortgage, utility bills, loan payments, insurance, and subscriptions are some examples.
Tip: let all your fixed expenses like EMI, Insurance, Rent, and Subscriptions on the auto-pay.
– Variable Expenses: These fluctuate each month depending on consumption or activities. Examples are groceries, dining out, entertainment, and gas.
Tip: you can also convert some of your variable expenses into fixed expenses like you can buy groceries for a whole month together at the start of the month.
- Categorize Expenses and Set Limits
After listing all expenses, group them into categories such as housing, food, transportation, entertainment, and savings. This will not be fixed every month it will vary every month so don’t worry. Sometimes you save sometimes you may get short of money.
– Housing: 30% of income
– Transportation: 10% of income
– Groceries: 15% of income
By setting spending limits for each category, you can control how much money is allocated toward different parts of your life.
Tip: if this month you saved some amount in housing you can keep that aside to adjust with your next month’s expenses. Don’t just rush for the investment.
I suggest not investing the amount immediately as it will help you balance when you are tight with your budget.
Yes, if you accumulate enough, you can invest the surplus.
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- Manage Spending rather than tracking it.
You heard of people suggesting tracking your spending through spreadsheets or budgeting apps. But we have a better way to do that rather than this old hefty process of tracking everything. (which we will discuss later in this article).
Types of Budgeting Methods
There’s no one-size-fits-all when it comes to budgeting. Different methods work for different people. Here are three common budgeting approaches:
Zero-Based Budgeting
In a zero-based budget, the idea is to ensure that every rupee of your income has a purpose. At the start of each month, you assign every part of your income to specific categories like rent, groceries, savings, and entertainment. The goal is to end up with no leftover income because every rupee is accounted for.
Income – 50,000
Allocation-
Investment- 10000
Rent- 8000
Groceries- 5000
Electricity & gas bill- 2000
Travel- 3000
Entertainment- 5000
Subscription- 2000
Shopping- 5000
Others- 10000
If you underspend in one category, the leftover amount can be redirected to savings or paying off debt.
50/30/20 Rule
This method divides your income into three categories:
– 50% for needs (rent, groceries, utilities)
– 30% for wants (entertainment, dining out)
– 20% for investment and debt repayment
If your monthly income is ₹50,000, for example, ₹25,000 would cover your basic necessities, ₹15,000 could be used for discretionary spending, and ₹10,000 would go towards saving or reducing debts.
This rule takes a balanced approach to balancing essential and discretionary spending.
Envelope Method
The envelope method is an old-fashioned but effective way to manage your finances by dividing your income into physical envelopes for each spending category. For example, you might have separate envelopes for groceries, transport, dining out, and entertainment. At the beginning of each month, the money for each category is placed in its designated envelope. When the money in an envelope runs out, you are unable to spend in that category until the following month. This method is particularly useful for those who tend to overspend, as it forces you to stick to the budgeted amount for each expense.
Emergency Fund
An emergency fund should cover 3 to 6 months of living expenses and be kept in safe, liquid assets like a high-interest savings account or liquid fund. By building and maintaining an emergency fund, you can protect your financial stability and reduce stress during life’s difficult times. You can save for the emergency fund monthly or can put your one or two bonuses in it. Before you start investing anywhere you should first prioritize creating the emergency fund.
Suggested Allocation Strategy:
Immediate Cash (10% to 20%)
- Purpose: For small, urgent expenses (e.g., minor medical bills, car repairs).
- Where to Keep It:
- High-interest savings account.
- Liquid fund in a mutual fund.
- Pros: Immediate access, low risk.
- Example: Keep ₹30,000 in a savings account for a ₹3 lakh fund.
Near-Term Emergencies (30% to 40%)
- Purpose: For medium-sized, foreseeable emergencies (e.g., job loss or bigger home repairs).
- Where to Keep It:
- Fixed Deposits (FDs) or Liquid Fund with a bank that allows partial withdrawal without breaking the full deposit..
- Pros: Relatively safe, higher interest than a regular savings account.
- Example: ₹1 lakh in a liquid FD or Liquid fund.
Longer-Term Reserve (40% to 60%)
- Purpose: For more significant, long-term emergencies (e.g., prolonged unemployment, severe medical expenses).
- Where to Keep It:
- Short-term government bonds or short-duration debt mutual funds.
- Sweep-in FDs: These automatically transfer surplus from your savings account into higher-interest FDs.
- Pros: Offers better returns, while maintaining a relatively safe investment.
- Example: ₹1.5 lakh in short-term bonds or ultra-short-term debt funds.
Conclusion
Budgeting is more than just tracking your expenses; it’s a powerful tool for taking control of your finances and achieving your goals. By creating a plan that suits your income, expenses, and lifestyle, you can avoid overspending, save for the future, and have peace of mind in knowing you’re prepared for unexpected emergencies. Whether you choose zero-based budgeting, the 50/30/20 rule, or the envelope method, the key is to stay consistent and adjust as needed. Start small, be patient, and watch how budgeting helps you gain financial stability and freedom.