How making a personal budget helps you manage your finances better

A financial plan is said to be successful if it lets you achieve your life goals. However, for a financial plan to work, it needs to be synced well with the specific situation of the person for whom the plan is made. As each individual has different earnings, expenses, liabilities, dependents, life goals and the earning life, each individual needs a unique plan that works in his/her specific case. This is where making a budget comes into picture. It helps you get a complete awareness of your current standing and future course that you may have to take to reach your life goals.

"With overspending having become a common lifestyle problem, the habit of saving becomes imperative for improving the financial scenario. As is popularly known, money saved is money earned. Budgeting is more important today because most of us work in sectors where job stability is a myth and inflation is always depreciating the value of money," says Sousthav Chakrabarty, Co-founder and CEO Capital Quotient. We tell you five unique advantages of making a family budget and how it helps.

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Budget reveals your financial position

Making a budget requires you to list all your income and expenses with every minute detail. You can list all your expenses under broader categories such as household recurring expenses, household consumer durables, rent, electricity, commute, education, medical, insurance premium, dining out, entertainment, apparel, travel, gifts, donations and occasional celebrations. This helps you identify the extent to which each expense impacts your finances. Whenever you think of adding any additional expense the budget will immediately let you know your affordability and whether you should go for it or not.

It helps you fine-tune your expenses

When you prepare such a monthly budget for full year, it gives you a sense that if you lead a similar lifestyle without any change then how much money you can save for investment. This annual saving capacity lets you calculate the corpus you can build with the current savings for your different life goals. However, if this corpus does not match with life goals that you have set, you will have to work backward. The big picture helps you curb some unnecessary expenses which you can easily do away with and also other expenses which you can postpone without any major disruption.

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You learn about limitation of your saving capacity

When you need to cut expenses to boost your savings, the discretionary expenses should be your first target. A budget helps you understand the annual and long-term impact of any tweaks that you do with your expenses. If it does not help with enough saving to fulfil your life goals, you will have to move towards other expenses and see what kind of scope of reduction is there. For instance, if you are spending a higher amount on rent you can review the situation and see if there is an alternative to bring down your rental expense. Such a cost-benefit analysis of most of your unavoidable expenses will help you know the extent to which you have to squeeze them to generate additional savings.

You can set realistic goals

The monthly budget helps you check the scope of maximum saving and a point beyond which you cannot curb expenses to increase your savings. If this maximum rate of savings helps you achieve your life goals, the budgeting exercise has already helped you in increasing your investments. However, despite this exercise if you find yourself nowhere close to your life goals, you are confronted with the reality. In such a scenario the best course of action would be to bring down the life goals to a level where you can achieve them with your current financial position. For instance, if you were planning to go for a Rs 1-crore house, you may have to settle with just Rs 75 lakh. If you were planning to buy a car of Rs 15 lakh, you may have to settle with Rs 10 lakh target.

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You can manage your cash flow better

A monthly budget for a full year gives you advance knowledge of cash flow positions, which may vary each month. For instance, there could be some annual payments such as annual school fee of your children, property tax and insurance premiums; there could be quarterly payments of school or college fee of your children and so on. There could be monthly expenses, which may vary with seasons such as electricity expenses that tend to be higher in extremely hot or cold weather. If you make bulk income tax payments in the last quarter of financial year, it may significantly impact your monthly budget. So, there could be some months with higher savings while others with shortfalls. If your surpluses appear to be good enough to meet the shortfalls, your budget is nicely balanced. However, in case you anticipate bigger deficit, you will have to make some tweaks and postpone avoidable expenses. Else you will have to go for short to medium term borrowings to manage the cash flow.

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