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A simple 5-step guide to building a effective household budget

Manvi Agarwal
·5-min read

All great financial planning begins with effective budgeting. Whether you are trying to pay off your bills, control your spending, saving for a dream home; building a monthly budget is the stepping stone to realising your financial goals.

Generally, people associate budgeting with restrictions. They imagine themselves pinching pennies, leading a conservative lifestyle. But a budget need not be restrictive to be effective. There are steps you can undertake, to create an effective budget while maintaining a healthy lifestyle.

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Here we outline a simple 5-step guideline to achieve the same:

Step1> List all your expenses and sources of income.

Start by listing out all your monthly household expenses. These include your utility bills, groceries, EMI payments, gym fees, medical, shopping etc. Analyze the past six months, it will highlight any expenses you might have missed. Crosscheck them with your credit card bills or your account statement.

Consequently, list all your sources of income. Other than your monthly salary, look for any and dividends or interest payments you receive regularly.

You must understand the flow of your money. Where it comes from and how you are spending it. This exercise can help curtail some of the overspending habits oblivious to you. For instance; a recent survey revealed that most people end up overspending on entertainment and eating out. Cutting down on such expenses can leave you with more money. Money to re-pay loans, boost your savings etc.

Step2> Assess your financial future

Budgeting is the cornerstone of financial planning. It is an effective tool for realising your financial goals. But if you are new to investing, chances are you are not clear on your financial goals, leaving you clueless on how much you need to save.

Start by defining what is important to you and use that information to outline your financial goals.

A short–term goal might be to pay off debt or buy a new appliance.

A medium-term goal may be to take a luxury vacation or save for a new car.

A long–term goal includes retirement plans, paying off a home loan or saving for your child's education.

Identifying financial goals defines all other significant aspects of investing. Moreover, it establishes your savings objectives, that must be factored into your monthly budget. Maybe you are not saving enough for your child’s education or putting enough towards your retirement. The key is to know where you want to be, so you can get there faster, by making amends today.

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Step3> Create a realistic spending plan

Once you have outlined your goals and evaluated your expenses and income, the next step is to create a budget; a spending plan. One that will help you save adequately every month to realise those goals.

If you are saving enough for your goals, that is fantastic! Continue with your existing plan and start investing at the earliest. But if your expenses surpass your income, you have two options; look for ways to make more money or spend less.

Generally, it is easier to reduce your spending. So, glance through your budget and identify areas where you can make cuts. Shop and dine out less. Use coupons and take advantage of loyalty programmes. Save on electricity bills by using energy savers. Demotivate yourself from spending. Use cash instead of credit cards, it is a big demotivator to spending.

Keep some money aside for fun activities and pre-plan for spending on special occasions. It will ensure that you continue to follow it over the long-term.

Step4> Don’t be afraid to make adjustments

Maybe you quit your job, are getting married, have a child on the way. Whatever the reason, your long-term goals are bound to change with time, forcing you to adjust your budget.

Furthermore, there is a good chance that the first draft of your budget didn't work out. Maybe you missed out on a significant expense or forgot to create a fun fund (money kept aside for fun activities), requiring you to change your budget.

The knowledge of the fact that your budget will change should not demotivate you from creating one. Knowing that your monthly budget might change does not mean setting one is pointless.

A sound budget not only gives you direction, but it also serves as a great starting point to successful financial planning.

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Step5> Make it a habit

No matter how a great a budget you develop, it will not help you, if you don't follow it. The key is to make it a habit.

According to a 2009 study published in the European Journal of Social Psychology, it takes 18 to 254 days for a person to form a new habit. The study also concluded that it takes an average of 66 days for a new behaviour to become automatic.

So try to make it a habit. Furthermore, hold yourself accountable. Don't just jump into it, take small steps towards significant changes. Keep some money aside for special occasions and fun activities. And maintain an adequate emergency fund (6-9 months of household expenses kept aside for unforeseen events). These steps will take away any monotony from budgeting, ensuring you stick to it.

A budget only works if you are honest about both; your income and your expenses. You must be willing to work with detailed and accurate information about your earnings and spending habits and make amends. Bear in mind, that small changes in your lifestyle today, although challenging, can ensure a much better and a financially secure tomorrow.

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