As a young professional, whether salaried or self-employed, you may have certain financial aspirations and goals that you want to accomplish in the future. These could include buying a home, building a retirement corpus, starting a new business, etc.
But the key to realising these goals and living a financially stress-free life in the future is to manage your money today efficiently. This is where budgeting plays an important role. It is one of the best personal finance tools that helps you manage your income, expenses, savings, investments, etc.
What is budgeting?
Budgeting is an integral part of personal financial planning. It is basically a plan that helps you keep track of your income and expenses for a specific period, which could range from one week, one month to one year.
Budgeting includes assessing your overall income and allocating a portion of it for different purposes, such as expenses, savings, investments, etc. Preparing a budget is one of the best ways to save money and achieve your financial goals.
Importance of budgeting
As a young professional, you may receive plenty of money management tips from your parents, friends and other well-wishers, and almost all of them would suggest you prepare a monthly budget. But why is budget considered such an important personal financial planning tool? Here are the reasons –
- Budgeting allows you to keep track of and control your monthly expenses. Thus, it ensures that you don’t spend more than your income.
- When you prepare a budget, you can allocate a specific part of your income towards specific goals, such as saving for home purchase, paying off the debts, going on a vacation etc. Thus, it helps you be more focused towards your financial goals and accomplish them.
- Another important reason why budgeting is important is that it is one of the best ways to save money for emergency purposes that may occur anytime without any prior warning. Thus, it helps you be well-prepared for any contingencies.
- Budgeting helps you track and manage your debts in a better way and ensures that you prioritise debt repayment.
- Preparing a budget allows you to manage your money better and by knowing exactly where you are spending, you can have a proper plan in place. This, in turn, helps you reduce financial stress and give you peace of mind.
How to prepare a budget?
Now that you know what budgeting is and the importance of budgeting, you must also know how to prepare a budget. Preparing a budget can seem quite daunting since it involves a lot of planning and decision-making. But it is not as hard as it may seem. Once you know how it is done, this could be one of the best money management tips for beginners that could potentially change your life for the better, and you can make informed financial decisions. Here are a few steps for you to keep in mind while preparing a budget.
It is impossible to know or predict what the future holds for you. By knowing the answers to a few basic questions in life, you can be well-prepared for anything. For example, when you start budgeting, you must have a definite goal in mind. This will work as a stepping stone to start your future planning.
You must decide at what age you want to retire. What are your future plans? Do you want to have children, and what plans do you have for them? List all your answers and also define your priority goal.
Many youngsters fail to manage their finances mainly because they don’t have a clear agenda or goals set for themselves. So, simply by defining the goals for yourself, you would be in a better position to understand how much you need to save to accomplish each goal and for how long you must save. Also, your priorities may change overtime due to changing circumstances, and budgeting can help you plan finances accordingly.
- Distinguish your needs and wants
When you prepare a budget, it is paramount that you identify your needs and wants. There are many things you may want but you must have the financial capacity to afford them. You may want to get a loan or use your credit card to purchase things you want.
For example, you may want to buy a car. You may even take out a car loan to purchase your dream car. But remember, a car is a depreciating asset, and its value will decrease over time. Hence, it is advisable that instead of buying an overly premium car, you can purchase a car that you can afford and repay the loan within five to seven years.
In a nutshell, focus on taking care of your needs first, and then, if you have any surplus money, you can think of purchasing things that you want. Also, refrain from taking too many loans or using your credit cards, as they can destroy your financial health and leave you stuck in deep debt.
One of the most popular and common financial advice by experts for young adults is the 50-30-20 rule. It is also an effective strategy for making your budget and planning your finances for the future.
This universally accepted rule of finance helps you create a budget by breaking your finances into three parts –
- 50% for Needs—The rule states that you must allocate 50% of your finances, i.e., income, to covering your regular and mandatory expenses like utility bills, children’s school fees, groceries, rent, etc.
- 30% for Wants – You can keep aside about 30% of your income for leisure and entertainment activities like vacations, shopping, etc.
- 20% for Investments – You must compulsorily allocate at least 20% of your income towards savings and investments. Ensure you invest in appropriate avenues that align with your goals and risk-taking capacity. Popular investment options include mutual funds, PPF (Public Provident Fund), and NPS (National Pension System).
- Build an emergency corpus
Even before you start investing, it is critical that you build an emergency corpus. You must set aside this fund for emergencies and never touch it unless there is an emergency.
Conclusion
Budgeting is an effective tool that provides financial security and stability and helps you achieve your future goals. But budgeting is not a one-time task; you must do it every month while being most disciplined with your prepared budget. So, start budgeting now and take your first step towards financial freedom.
Disclaimer: The article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of The South Indian Bank Ltd. or its employees. The South Indian Bank Ltd and/or the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial/non-financial decisions based on the contents and information’s in the blog article. Please consult your financial advisor or the respective field expert before making any decisions.