Money is important. Yet not many people manage it well. Many find getting the first step on money management, “budgeting ” correct, difficult. Here is the easiest seven step monthly budget plan you will ever need.
1. Calculate the total household earnings
Calculate the earnings of each household member to get an idea of the average monthly household income. This is more important, when there are two or more earning members in the family and, multiple sources of income. Factor in the income, even if it is from a part-time job or a weekend gig. This helps one to get a consolidated view of the household median income.
2. Maintain a record of Expenses
From sundry expenses to commutation, home maintenance to medical and entertainment, calculate the fixed monthly and variable monthly expenses of the complete household. There are several ways to do so. It could be in a spreadsheet on your laptop or an expense tracking app. Even the traditional paper-pencil method works. One needs to track this data, irrespective of the tracking method.
3. Analyse spending patterns
The entire family must participate in this exercise to map the joint as well as the individual expenses of all family members. This helps to maintain better accountability and identify areas where expenses can be reduced. Try to identify spending trends. Are the weekends eating out taking a chunk out of the savings or traveling with cab service apps during the week is draining the pocket fast? Divide the expenses into fixed and variable.
If more than 40% of the household income goes into paying debts such as credit card dues, bike or car EMI, appliances EMI, stop using credit cards altogether, pay off the existing debt, and do not take on any additional liability.
4. Plan Expenses Ahead in Time
Plan for all known expenses in advance. Setting aside the total household expense amount along with personal expense amount for at least 3-6 months is a good start. For those with a home loan include the EMI amount as well. One can also plan for special occasions or purchases, such as the annual family trip to an exotic location or buying a new vehicle. One can invest in Liquid / Short Term Mutual Funds for collecting this amount. Try to reduce variable expenses, and the surplus can go towards the next step.
5. Consolidate your debts
If more than 40% of the household income goes into paying debts such as credit card dues, bike or car EMI, appliances EMI, stop using credit cards altogether, pay off the existing debt, and do not take on any additional liability. Consolidate all your unsecured debts and pay off those first. Start with paying the highest interest rate, and no tax benefits debts and move to the lowest.
6. Evaluate Progress
By far, this is one of the most critical steps to take month-on-month till the time the family gets acquainted with the budget concept. There is a stronger possibility of slipping in the initial phases, yet it is essential to continue the exercise to maintain an understanding of the household spends.
7. Keep increasing Savings
One should always increase savings based on the annual hike and increase the amount of savings by 10% year-on-year. This aids one to accumulate a bigger corpus towards long-term goals such as higher education for the kids, travel, and medical needs of family members, or collecting a significant retirement corpus. Whatever the case, one should try to increase saving every year as well as use the additional income such as Annual Bonus, etc. as well to boost the investments further.
So, start budgeting from scratch this winter and increase your savings to fulfil your financial dreams.