How to Create a Budget?

 Creating a budget is although a very simple exercise, still one should be very clear what is the result needed from it. If only information is the objective then a simple statement showing income & expenditure will solve the purpose. But if you want to track how your expenses have been moving around and where you have been releasing more then a detailed budget should be created.

Whatever be the objective a budget always helps in managing your cash flows more efficiently.

Here are few inputs which will help you in creating your own personal finance budget-

a) Collect all Information

Collect all financial information of your personal finance. Income Certificate,Insurance policies, Loan EMIs, Bank statements, Investments certificates, utility bills, CC Statements and others are documents to be gathered. This will dig deep into your income & expenses and will give an accurate picture of your finances.

b) Add Income from all Sources

Many individuals have income in addition to their employment or business which do not get accounted. Salary, Income from business, income from property and other sources where you have received any income should be recorded very clearly. For best result, take the net income after paying taxes. For salaried individual it’s easier as the tax is deducted by employer. For other sources do a calculation yourself or take help of your CA. If spouse is working you can either create separate budget or include her income too.

c) Expenses-Fixed & Variable

Make a list of all your expenses. A monthly expense worksheet will be more viable since you earn your income on a monthly basis. You can create categories of fixed and variable expenses which will give you a detailed analysis of where your money is going out. Fixed expenses will consist of monthly utility bills, rent, EMIs, cable payment etc. These are necessary expenses which you have to pay and so not liable to change. Variable expenses on other hand will cater to entertainment, travelling, etc. which you do not incur regularly. A detailed tracking can analyze your spending habits and where adjustments are required.

d) Monthly Tracking

Although you can track your budget half yearly or annually, a monthly budget is always a good option. Since most of your payout like utility bills, credit card payments, which require timely payments, are on monthly basis you should track then with same frequency. If there is any deviation in what you have recorded from actuals, you can make adjustments easily.

e) Correct the Balance Sheet

 Ideally your income should always exceed your expenses then only you will be able to create any surplus. If the equation is not matching then your income is not able to meet some of your liabilities.  You can make adjustments where necessary by reducing some of the expenses like entertainment etc which are not necessary and can be deferred till you reach the right situation.

f) Review your Budget Periodically

If you are following monthly budget, you should review it every month to identify any deficiency. Ideally when you start with a budget you should sit and identify the grey areas in next few months. If identified any deviation from actuals, you should make adjustments and track it regularly.

Creating a budget is the first step in a financial planning approach. Unless you are well aware of your cash flows you cannot rectify your financial problems. Budgeting is a very simple tool to give you command over your finances. Remember, even the governments over the globe rely on Financial Budget to track their finances and plan ahead.