Everything costs money. This means you start spending, right from the moment you start earning. Loan Singh is a digital lending platform that offers personal loans to salaried individuals, & some of these borrowers also default on their EMI repayment. So what good is your income, if you cannot fulfill your credit obligations? Seeing the difficulties faced by some of our borrowers, we decided to write this piece on the importance of budgeting. We will look at what budgeting is, its importance and things to keep in mind when drawing a plan.
What is Budgeting?
Budgeting is a process of creating a plan to spend your money. The plan, that you painstakingly create, which contains fields such as income, expense, bills, EMI, investments, etc. is called as a Budget. Budgeting helps you to determine, in advance, whether you will have enough money to do the things you need or would like to do. It balances your expenses and income. If the expense side is dominant, then you will get into debt.
Consider a scenario where you earn well, but are unable to save. You have no clue where your salary is used-up and hence are forced to borrow cash from friends or family to pay for bills and EMIs. When you are on the brink of such scenarios, it’s time to get a hold of it and start creating a budget. Millennials, nowadays don’t use budget in their vocabulary. Living month on month, they consider budgeting to be a control mechanism rather than a by word for financial leeway.
This is certainly not true. A budget simply helps you to spend smartly. It helps you to focus on your hard-earned money. It prevents you to over spend on less important things. It channelizes your resources to areas that are higher on your priority list. With India firmly enveloped in digitalization, you have the ease and liberty of spending via a credit card, as well.
The importance of Budgeting
Budgeting allows you to set-up a spending plan, which in-turn ensures that you always have money to spend on/for important things. You can stay out of debt, and can also get out of it if you maintain discipline towards your budget. Budgeting does not mean you become a miser and try to save every single penny. A good well-structured budget provides you, a salaried individual, a great opportunity to experience a comfortable lifestyle, with reduced financial stress. A good budget will help you plan for emergencies and celebrations.
A crucial point to remember is that you cannot increase your monthly salary at will. So, with your monthly income being static (unless you get a pay hike), you will need to limit your expenses to be able to save. Add to that your marriage expense, maintenance or purchase of a vehicle, wedding anniversary party and gift, etc. Rise in prices due to inflation doesn’t help either. Whether you’re a low income salaried individual or take home a large paycheck, you still need to follow a budget. Fixed incomes and ambitious financial goals or dreams make a budget most essential.
Having a budget also does not also that you don’t have to apply for a loan. A personal loan is a good option when you need quick cash and that too without any hassles or time delay. Let’s say that if you are the only working member in a family, it would be hard for you to improve your house without a personal loan. A loan will include EMIs that need to be paid each month. This EMI will show on the expense side of your budget.
Simply making a list of expenses versus income and jotting down numbers under each column daily won’t give you financial security or freedom. You have to analyze and implement the budget in your financial decisions. A budget will indicate warnings when you move away from the financial plan. Not having a well set budget will either leave you without a plan or without benchmarks to compare to previous month’s savings.
Ways to make use of your Budget?
Preparing a budget requires you to visualize not only the past spending behavior, but also look at your current status. Your budget then helps you to achieve a stable and stress free financial future. Let’s take a look at ways by which you can make use of your budget.
A budget helps you get an overall picture of what your finances are, and how money flows in and out of it. The goal is to have all possible information including your bank statements (slips, receipts), credit card information (payment statements), salary slips, etc. of the past 12 months, if possible.
Then find the average amount you spend monthly, and break this down into segments like fuel, gas, entertainment, household expenses, insurance, debts paid, medical expenses and end-savings per month.
Try to balance the income with the expense. This will show if you are in surplus (more income less expense), or in deficit.
Setting timelines for your goals is also a good practice. For example, you can start a small fund to save for travelling abroad and keep a target of 6 months to do so. You can then judge how much you need to allot every month towards the fund.
Emergencies can crop-up any time. It could be layoff from a well-paid job, illness, accidents, death in the family, divorce, bad investment decisions, etc. A well-structured budget can help you have the savings needed to prepare for an emergency. If it is possible, try preparing an emergency fund out of the budget. This spare money can also help you get out of a financial debt, should the need arise. Align the emergency fund to your budget and start with small savings.
Overuse of credit cards can lead to serious repercussions on your budget. Sticking to your budget also involves spending via credit cards at a minimum and only where necessary. It seems much more fun to go on a shopping spree over Amazon’s Great Indian Sale rather than to save now for a dream holiday same time next year. Sure, the offer is now and it has to be availed-of but do you really need to make that expense? Do you really need a cable connection plan that includes 60-70 channels or 25-30 pair of heels? Good budgeting is important to help you re-think your spending habits and focus on your financial goals.
A good view of your financials will help you stay focused on wealth building. You need to save to have a grand wedding for your children or be secure during your retirement. Budget is important to eliminate debts, which once done will help you to re-direct that money towards your savings.
If you don’t have a budget in place, you will not be able to afford a new flat screen TV, a swanky new car or jewelry for your spouse.
Budgeting is mostly avoided by a salaried individual due to work or other priorities. It is a great way to save you the grief of overspending and falling into debt. It does not stop you from enjoying your life, rather ensures that you enjoy your life in a planned way.
Budgeting helps you keep track of all your expenses from personal loan EMIs, credit card bill statements, ATM receipts, rent receipts, monthly utility bills, monthly shopping bill, restaurant bill, dividend receipts, insurance policies, etc. The usual rule to follow towards budgeting is the 50-30-20 rule. According to this rule 50% of your income should be used to spend towards essentials like food, clothing, rent, fuel, cable, etc. 30% of your income to be spent on discretionary things such as dining out, online shopping, festival shopping etc. The balance 20% is to be saved.
You can shirk any credit related worry if you adhere to your budget. Payments of personal loan EMIs and credit card bills will be like a breeze because a budget will ensure you have money in the bank. You can use your budget to even clear-off a personal loan ahead of tenure. Following a strict budget over a period of time, will build a pattern that will tell you how sooner you will be clearing your loan and that will give you a chance to plan what you will do with the money you otherwise would have spent on the EMI. The budget also helps you set-up short term and long-term goals such as plan a vacation, purchase a new or second hand car, or plan for your child’s education.