Many of you manage to come up with a decent budget, but may end up looking to be just that - budgets! The reality turns out to be far from what you chalked out initially. This typically happens due to an oversight that renders your work useless. Here are a few tips on how to build a realistic budget:
Anything that can go wrong will go wrong
Murphy's Law fits into many aspects of life, it somehow fits the budgeting aspect to the 'T'. Many people don't set aside money for items like medical emergencies, car damages and home maintenance. These may be irregular costs, but they are not necessarily unexpected. Almost all cars and homes eventually need overhauling. The amount of repairs depends upon age, quality of construction and maintenance; it may do us good if we set aside a certain nominal percentage out of the net earnings on a monthly basis to cater solely for such contingent expenses.
Drawing inferences from past
The only way to build a realistic budget is to draw regular and appropriate inferences from the past expenditures on an itemized basis. The amount spent on each of the items may not vary drastically on a month-to-month basis unless they are seasonal / based on occasions. In fact, there are trends that one needs to keep in mind whilst building the budget. One could provision for purchasing apparels, sweets, household items / durables a little higher during festive season. Similarly, the electricity bill could possibly run high during summer due to increased usage of AC / fan.
Save first, spend later
Most of us would have thought that this should have been written the other way round. However, a more effective way of ensuring that you buy only what you need and do not end up in a cash crunch, is to set aside a percentage of money as savings and use the rest for buying essentials and utilities. Moreover, by strictly adhering to this principle, you will put your money to work and build a decent corpus for your financial goals.
Emergency fund
Typically one should hold at least 3 months of household expenses in easily accessible avenues; this could be your savings bank or flexi-fixed deposits, or for the emergency fund. The emergency fund may not always necessarily cater to medical emergency; this fund could come in handy for other reasons like job loss / transition, and other unexpected and unavoidable expenses
Include the fun element
Although, going out for luncheons, inviting friends over could be an occasional thing, it becomes important to provisions for these aspects as well. However, if you do not keep a tab on these, it could burn a big hole in your budget and turn it topsy-turvy.
Remember your investment commitments
Your premium payment on the insurance may be due only during a particular month of the year; however, one has to realize that this has to be planned out of the net earnings. One usually plans for the typical ongoing expenses: groceries, utilities and fuel, but forgets yearly expenses such as insurance premiums, property taxes etc
Trying to keep up with peers
Peer pressure seems to be affecting every aspect of life, specially the lifestyle that we maintain. If your friend bought a new smart phone, you would want to buy one on par or even better than that to indulge in the experience of using one too. There are also many other ways in which one could end up spending more than one actually earns. This is the easiest and most common means of getting into a debt trap! Remember that buying only what you need actually makes you stand out in the crowd.
Not being motivated
Sticking to a budget would require more or less the same willpower as one would while dieting or doing regular exercise. One should self-motivate by awarding oneself if the budget is successfully implemented. The reward could be in the form of extra self-indulgence, however, remember the whole point of building an effective budget is to put your money to best use and not to indulge in frivolous expenses.
Hope this helps you to start-off on the path to build an effective budget sans loopholes. And come the end of the year, your adherence to the budget should make you proud!
