Why is Budgeting essential for your personal finance—And How to create one?
January 12, 2025
Do you want to spend a vacation with your family without being haunted by your debts, how to pay your next EMI or about your daughter’s or son’s higher education education fee?
The most important finanacial plan you can make is budget. Budget is a plan how money will you spend and how much you save on a monthly basis. You might still spend money thinking you have it, only to find you are empty handed when you need the most!
Advantages of having a well planned budget;
- Will reduce Financial stress and improve Mental Health – Stress will impact your mental health, period! Having no idea about yours and family’s future will affect your mental well being.
- Avoid Over spending – When you budget and follow the budget with discipline it helps you avoid over spending and accumulation of more debt.
- Create wealth by Investing – Having a budget helps you to achieve create wealth by regular investment options like SIP and make use of Compounding which is the 8th wonder of the world!
- Budgeting can help with retirement– Do you love your children? If yes, you need to plan for your retirement. Budgeting allows you to assign a certain amount as a priority for your retirement planning which will help your children live freely without concerns about you.
- Gives you control over your finances and Life – Personal budgeting helps you not to overwhelm with your debts or credit card bills. It also helps you handle emergency situation with ease and take better decisions.
Build an Emergency Fund:
Track your Income: this is nothing but track your monthly income such as salary, side income, passive income.
List your expenses: Fixed & Variable
Your fixed income includes rent, loan payments, EMI, utilities, insurance, phone bills, broad band etc
Your variable income includes – groceries, transportation, entertainment, eating out,
Use a Budgeting Method: 50/30/20 is a great budgeting tool.
Housing, utilities, insurance, children school fees expenses (50%)
Eating out, movies, vacations expenses (30%)
Savings and debt payments (20%)
Set Financial Goals:
Short- Setting up an emergency fund, paying debit card or personal loan, vacation plans etc
Medium-buying a car, down payment for a new house etc
Long– Retirement planning, children higher education etc
Save and Invest: Make you save money and invest for your secure future and financial goals. Make sure you have a balanced port polio based on your age and risk tolerance.
Control Debt: There is Good Debt & Bad Debt. You need to avoid bad debt by staying within your budget limits. And you must have a plan to pay off your current debt such as personal loan, credit card or borrowed money
Best strategies for paying off debts are Snowball Method & Avalanche Method
Debt Snowball Method: Focus on paying off the smallest debt first, then move to the next smallest, etc.
Debt Avalanche Method: Focus on paying off the debt with the highest interest rate first, then move to the next highest.
Periodic Review: This is to check if we missed out to add any newly incurred income or expenses to our budget.
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