Explained: What Is Budgeting And Why Is It Important?

Budgeting is an itemized summary of the income and expenses for a specific period. Simply put, it's a breakdown of the revenue that comes in and what you intend to do with that money over the span of a fortnight, month, quarter or year. You can make a budget with the help of a spreadsheet, a mobile app, an online tool or simply with a pen and paper.

A budget helps keep you organized and gives you a good feeling about your financial situation. It makes you feel more confident in the financial decisions you need to make. It tells you when you can afford to eat out, whether you should, or if that money could be channelized towards something more constructive, such as investing or saving for a goal.

When you look down at your budget and see the breakdown of expenses, you'd be surprised by what you find. Perhaps you can juggle things around and tweak some costs to make room for more money.

A budget can also cut down your stress around finances. For instance, if there is a sudden car problem or an unexpected medical emergency, you no longer have to panic or wonder if you have the money when you are on a budget. That's because you already know and have a plan in place to put it into action. Having a sense of financial clarity is vital as it helps you remember that it's your money, choice, and future.

Also Read: Explained: Should You Invest In Tax-Saving ELSS?

What's A Simple Budgeting Strategy To Start With? (50-20-30 Rule)

If you've never ever budgeted, today's a good day to begin. There are several ways to budget your money. For instance, you can start with the 50/30/20 rule.

This simple budgeting framework allows you to budget 50% of your income for needs, set aside 30% for your discretionary wants, and commit 20% to savings, investing, and debt repayment. You can also choose a wide range of budgeting plans, such as the envelope system and the zero-based budget.

How To Start Budgeting For Investing?

Now that you've set up a budget, you look at it and wonder how you can begin investing on a shoestring budget. If you're disappointed that you don't have the money, you'd be surprised to know that you're wrong.

The beauty of laying down a budget when planning to make investments is unlike buying a home or a large ticket purchase. If you're looking to allocate a portion of your income to investing, there are three factors you need to consider:

• Your current income

• Present life situation

• Future plans

With that in hand, your first preference should be to save for an emergency fund. This is a pool of money you should never touch under normal circumstances. It's only for when the unexpected takes place. Setting aside 6 to 9 months of your living expenses can be an ideal way to begin.

When investing for your future, look at your priorities. Understand which goals you want to achieve faster than the others. Look into what works for you and adjust your approach to meet your goals. For example, after writing down your net income, list down your expenses and subtract your expenses from the income. Regardless of the number you see, make 'now' the right time to set down a financial plan for all your goals.

Also Read: Systematic Investment Plan Or SIP: Busting Common Myths

Why do individuals fail to invest?

Investing is an emotional decision, as much as you'd agree or not. And one of the main reasons why you may have failed at investing is what you've decided to do based upon your emotion. Let's look at whether some of these reasons below apply to you.

• Psychology. Too many people look to invest to simply make a profit in the short run rather than stay invested and remain patient to allow their money to work for them.
• Lack of information. Educating yourself about different kinds of investments can help you know a thing or two about why you need to put your money in it. Following credible news sources, taking an online course or attending a seminar can help you educate yourself on investments and various theories.
• Failing to look at the larger picture. If you're looking to make big bucks, you need to think long-term. Making a ton of money does not come overnight with investments.
• Not enough experience. As your perspective changes, knowledge grows, and you know to rein in your emotions, you'll be able to have a better hold on your investing nature.
• Fear of investing. This is a common worry that most people have and may apply to you, primarily if you've not invested until now. Not investing could expose you to inflation that can take a massive chunk out of your money. So if you believe in saving, you're not exactly winning. Investing is the key to growing your money.

Tips For Smart Budgeting

Are you a first-time saver? Is this your first foray into budgeting? Perhaps these smart budgeting tips can help take the stress and confusion out of your budget.

• Know exactly why you want to start saving money. Knowing what motivates you to save can go a long way in creating a clear and achievable savings target.

• Differentiate between short-term, midterm and long-term use.

• Use the SMART goal setting method: Specific, Measurable, Attainable, Relevant, and Time-bound.

• Keep track of expenses. Know precisely how much money is coming in and going out of your account every month.

• Segregate your fixed expenses from variables. Your fixed costs may include monthly rent, utilities, insurance costs, home loan payments etc. Your variable expenses may consist of grocery shopping, entertainment, eating out, shopping for clothes and so on. While there's not much flexibility with fixed costs, you can lower your variable expenses.

Now that you know why you want to budget, what you're looking to save for and a clear picture of your fixed and variable costs, it's time to see how much you can save to start investing. Use the 50/30/20 rule or the zero-based budget or create your own budgeting contingency plan.

Also Read: What Is Goal-Based Investing, How Can It Help You Create Wealth?

This story is a part of BOOM Money's series on personal finance