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   Many of have faced a situation where we have gone to withdraw money from our ATM at the end of the month only to have a “Nil” balance staring at us. This is where a budget fits in.

What is a budget?

    A budget is a tool that helps you track your income and expenses and to plan your savings. It is a roadmap that helps you navigate your finances by revealing where your money is going.
   A well-planned budget will enable you to identify areas where you are spending excessively. Accordingly, you can alter your consumption habits. A budget will also help you identify your surplus income. A recurring surplus will also give you the ability and the confidence to keep upgrading your family’s lifestyle through better affordability of goods (TV, refrigerator, car, furniture, etc) and services (holidays, restaurants, doctors).
   Remember, most people get rich and stay rich by investing their surplus income wisely. Each one of us consumes and saves. Therefore, budgeting is an activity that should be done by everyone, irrespective of age and financial status.

I am not convinced… tell me why should I keep a budget?

    Budget aids in planning expenditure and meeting both present and future financial goals. It helps plan for situations where you are spending more than you earn. It helps in prioritizing and identifying areas where you can cut expenses.

Can this wait, or do I have to do this exercise frequently?

    A budget should ideally be prepared annually, once you have an understanding of your expected income for the year so that you have a view of your cash flow situation over an extended period of time. This helps you when you are thinking about purchasing big-ticket items.
   You should also create a monthly budget so that you can closely track your actual spending against that budget on a regular basis. If you find that you are overshooting the budget in some areas, you can immediately take measures to reduce your expenses. You need to plan for essential recurring expenses on a monthly basis (food, transport, rent, school fees, loan EMIs), and also budget for some discretionary expenses based on your desires and unpredictable needs.

Itemize your sources of income

    Itemize your income from all sources such as salary, expected bonus income, investment income, rental and pension income. Some of these items might occur only annually, so you might need to estimate the monthly figure.

Estimate your expenses

    Categorize your expenses under common heads. One way of doing this is through the classification of fixed expenses that you must incur (food and rent) versus variable or discretionary expenses (entertainment).

Do I have a surplus or a deficit?

    Calculate the difference between your income and expenses. If this is a positive figure, you have a surplus, whereas a negative figure suggests overspending. As a result, you might need to borrow money to support your lifestyle. At the end of each month, compare the actual figures with the budgeted ones. An occasional variance might be acceptable. A recurring variance — shortfall — might suggest a financial trouble ahead.

Help! I have a shortfall!

    Sometimes we all spend beyond our means. This results in a budget shortfall. When this becomes a recurring problem, it becomes the sign of a much bigger problem which needs to be fixed. If you ignore this, you are setting yourself up for financial failure. In the short run, we might address a shortfall by taking a personal loan or by growing the balance outstanding on our credit cards or by borrowing from a family member. However, these are only temporary solutions .
   In the long run, the problem needs a deeper solution. We will need to take a detailed look at what are essential expenditures and what are purely discretionary that we might be willing to cut down on to release some more cash.

Give me more… I want to make the most of my budget

A budget is useful if you are diligently recording your expenses and reviewing it regularly. Otherwise, like a broken New Year’s resolution, the discipline of keeping a budget can also break down very quickly. Review your budget periodically. Based on the budget you can find out if you need to increase your sources of income by taking a second job. You can decide which expenses are unnecessary and can be cut down.

Get started with your budget

• Make a realistic budget based on the expenses in the previous months.  
• If you are new to budgeting, start tracking your personal expenses daily.
• Plan your shopping trips as per the budgeted items so that you can avail of the best discounts.
• Do not spend the surplus savings that you have achieved — instead save it in an emergency fund.
• Take help of a financial planner, if your are unable to maintain a budget.
  

Things to remember:

• A budget is a planning tool that can keep you away from financial trouble.
• You should maintain a regular budget and review it regularly.
• Use your budget to prioritize your expenses and cut the amount of discretionary expenses.

A typical budget will have the following:  

• Housing Expenses (rent and others)
• Household Expenses
• Clothing, Conveyance
• Education, Healthcare
• Entertainment and Recreation
• Personal Care, Miscellaneous
• Debt and EMI payments