When I first started on my journey of being more aware of personal finance, the word “budgeting” was an anxiety-inducing term. Looking back, it was stressful because I wasn’t sure about my spending habits. I knew I was “probably” (read most-definitely) spending more on certain things than I should and didn’t want to face the reality. While there are no quick fixes to become better at budgeting overnight, there are few things that helped me to get better at it.
Track your current income and spending
To begin your budgeting journey, it’s essential to first understand your current financial situation. One way to do this is by reviewing your monthly income and expenses. You don’t need any special tools to get started – a simple Google sheet will do. Begin by looking at your credit card statements and bank account withdrawals from the past 90 days and for each month, assign the spends into different categories. This will give you a clearer picture of where your money is going. Some of the common categories can be:
- Housing
- Transportation
- Grocery
- Dining
- Bills (Utilities, Phone, Internet etc.)
- Clothing
- Entertainment
- Subscriptions
- Personal Care
- Travel
- Household items
- Miscellaneous
It’s important to remember that the goal of this exercise isn’t to judge or criticize yourself. The point is simply to become more aware of your spending habits so that you can make more informed decisions about your finances.
Next, add up all your income sources, including salary and any side hustles and investments, coming in during each month. If your income is greater than your expenses then your budget is already off to a good start.
Necessity, Need-to-have, Nice-to-have and Don’t care
Personally, I divide the spending categories into either – Necessity, Need-to-have, Nice-to-have and Don’t care. Necessity is what I have to spend for basic well-being or survival, such as housing, food (not dining out), utilities, basic clothing, transportation (gas, maintenance, transit pass/tickets). Need-to-have expenses are those that bring you the most joy or fulfillment in your life. For me, this is dining out and traveling, for you it will be something else. Ramit Sethi puts this nicely in his concept of money dials. Nice-to-have are things that significantly impact your quality of life but it feels nice to have them from time to time. Don’t-cares are just as the name suggests, you don’t care whether you have them or not. I’m not a car guy, I don’t care what car I drive or how it looks, it’s just a means for me to get from point A to point B and so I absolutely refuse to spend significant amounts on cars and don’t want to carry car payments.
Preparing a budget
The purpose of a budget is to allocate your money to the different categories and keep track of the spends during the month. First sum up all your income sources. Then you need to pay yourself first. Set aside a certain percentage of your income for savings and investments. A good rule of thumb is to aim for saving at least 10% of your gross income, but you can start with whatever percentage feels comfortable for you and work on increasing it over time. Next, assign a number to your necessities and then your need-to-have categories. If you have money left over after these then you may want to consider increasing your savings rate (try aiming for 15-20%), before allocating funds to your nice-to-have categories. You can use a sample google sheet like this to get started tracking your budget.
As you go through the month, take some time to review how you are doing. Set aside a day per week or bi-weekly to go over your credit card statements and track how much you are spending in each category. At the end of the month adjust your budget for the upcoming month. If you find that you’re overspending in certain areas, don’t get discouraged. It can take time and trial and error to get the hang of budgeting, but the most important thing is to keep going and make adjustments as needed.
