No one wants to lead a fixed lifestyle. The changes in the lifestyle of a person depend on his or her finances and savings.
As per the 50-30-20 rule, a person should be able to distribute 50% of their post-tax earnings to monthly basic amenities like rent or mortgage payments, groceries, insurance premiums, EMIs or credit card bill payments, and others.30% to wants which include dinner and movie outings, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet. And the remaining 20% to savings/Investing in Stocks or Mutual Funds, etc.
Another finance rule called the 30-70 rule, says that 70% of the income should gointo spending on monthly expenses. The rest 30% should go into your monthly savings no matter what.
Both these are budget techniques that aid in managing your finances properly and in a disciplined manner. This leads to the topic of budgeting.
So What is Budgeting?
Budgeting is nothing but a process of planning, forecasting, and categorizing the personal income into multiple groups based on your monthly needs and requirements.
Just like every business needs a budget to prepare for what’s coming ahead, even individuals require one. In layman’s language, it’s called a personal budget.
A budget tells you the inflows and outflows of cash from your pocket every month. A budget enables you to track and monitor your income and expenses and aids you in taking informed decisions accordingly.
Now let’s look at the Significance of Budgeting
Budgeting is very important for everyone to lead a financially secure life. It draws a road map showcasing where you are with your funds until you receive your next paycheck.
It also gives you a detailed picture of your expenses and savings. With budgeting, you are one step closer to achieving your goals, as it allows you to plan your long-term and short-term goals ahead. In addition to that, budgeting helps you from overspending your income and helps you understand where your money actually needs to be spent. Whether it’s short-term or long-term planning, budgeting keeps your financial health up to the mark, and aids you in achieving your goals without a hitch.
Through budgeting, you can augment your savings by investing in various financial avenues. Budgeting can also help you plan borrowings better as it can give you an idea of the amount of EMIs you can pay each month.
Moreover, you can also plan your other life goals like weddings, education, retirement, etc. You’ll have an upper hand with respect to your finances if you get your budgeting right. Isn’t it amazing? You get to prepare for what’s coming next.
If you are still not convinced about the importance of budgeting in personal life, here’s a List of Reasons That Reaffirms The Need For Budgeting that tells you why you need to prepare a budget right away.
- Avoid Unnecessary Spending: There’s nothing wrong in spending your own income to explore and experience a content life. However, just like credit cards have restrictions, your spending habits must have some limits too. Sometimes, people spend more than required, and later, pay the price for not being cautious about their finances. You won’t be facing these kinds of turbulences in your future if you prepare a budget and keep track of all your earnings and spending.
- Plan for your goals: People may have different goals in life like buying a house or a car, planning a vacation, or managing their kids’ education and even marriage. Budgeting allows you to stay focused on achieving these goals. With a budget, you can clearly set aside money required to be saved or invested for each of your short-term and long terms goals. In absence of a budget, it is very easy for you to drift from saving/investing for your goals in a regular manner.
- Prepare For Happy Retirement: Every person will retire from their job at some point of time in their life. So, the mantra is to save more today to lead a better life tomorrow. Budgeting helps you to make that happen. If you could set a certain percent of your monthly income aside for happy retirement, you’ll be able to make a good corpus.
- Prepare For The Unexpected: No one knows what the future looks like and the key is to stay put and be prepared in the present. There would be pitfalls, unexpected emergencies, and ups and downs in the future that are still unknown. Things like job loss, health issues, planning for a honeymoon, etc, require quick money. This can only happen if your finances are in a good shape. Budgeting pulls you out from the life crisis situation and keeps you floating on the top.
Now that you know the importance of budgeting, the next big question is how to get started in creating a budget for yourself. The FIST tool at Freecharge can be a good place to begin. It is a small questionnaire that requires you to answer 5 questions and based on your input a score is calculated that tells you how strong you are financially. It also helps you assess where you are currently with managing your money. This can serve as a good starting point for people who are just starting out on managing their money. So do check it out on our app.