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Personal Budgeting Strategies to Improve Financial Health
We often hear the term budget or budgeting in the context of corporations, projects, governments, and even creative endeavours. It is an essential planning activity that tries to ensure that we don’t run out of resources to survive and achieve our goals.
Budgeting is just as important in your personal life. Most of us ‘budget’ our spending and expenses almost all the time but did you know that there are ‘budgeting strategies’ that you could use as useful mental frameworks?
First, let’s recap by saving and budgeting is important.
Savings help plan short-term goals: Savings goals need not only be long-term in nature. Instead, you should have short-term goals as well. Be it to purchase your much-awaited gadget or a long-pending trip, short-term saving targets shall help you accomplish your goals.
Answer to a better future: Savings is the key to unlocking a better future. Be it to purchase a house, or save for retirement, you can secure your future by having long-term savings goals and following them religiously.
Hedge during emergencies: Money is the ultimate saviour during emergencies - medical or non-medical. Having an emergency fund ensures financial stability during times of crisis.
Having a proper budget in place is one of the best ways to save money. While many people stay reluctant in taking this step, it's wise to warrant a budget to avoid overspending and carry out planned expenses. This in turn shall help save money. Here are some probable reasons for you to save and take up budgeting:
Helps avoid overspending: Irrational spending of money is the main reason why we struggle to save. Overspending limits your spending power due to the growing debt. By having a concrete budget, you will be in a better position to decide when to stop spending.
Helps achieve goals: Having a defined budget helps you prioritize your goals. Some common goals could include becoming debt-free, saving for buying a new home, or starting a new venture. With a budget, you can track your goals periodically to ensure you're working towards them diligently.
Puts you in total control: With budgeting, you are surely going to have complete control over your money and expenses. Besides, you yourself get to determine your goals, be it short or long term, without any external pressure of debt.
Now, let’s look at some popular budgeting strategies that shall help you manage your wealth and save wisely.
This approach is based on the needs-wants-saving strategy and helps you determine which expenses are needs and wants. But in all generality, this strategy suggests ways to divide your income after tax in a proportionate manner.
The strategy suggests that one should allocate almost 50% for your needs which could include non-negotiable elements such as housing, groceries, utility bills, and loan payments. Besides, 30% should be allocated towards wants or personal expenses such as dining out, entertainment and travel. The remaining 20% amount should be saved for emergencies, such as retirement savings or debt repayment.
Averse to what the name suggests, a zero-budget strategy isn’t about depleting your bank account. Rather, you subtract expenses from your monthly income until you are reminded of the most pressing expenses for the month. To simplify, you are working towards a zero-waste situation with absolutely no income being accounted for.
This can be done by assigning expenses into several categories. The main categories could include food, housing, and utilities, while other categories could include bills, debt payments, entertainment, and savings. Then on, you can assign the leftover money to the category that needs it the most.
Considered an old-school technique, an envelope budget divides up portions of your actual cash into several envelopes that are labeled for various expenses. Having cash creates a concrete, hands-on experience each time you plan to spend money. This shall help you stay on track with your expenses and have control over it.
The value-based budget simply refers to an intentional effort to spend any leftover money on purchases or causes that are in sync with your values. The way to evaluate how you are currently spending your money and how you plan to is by reviewing your bank statements for the last three months and pondering upon your values.
For instance, after analyzing your bank statements, you realize that you spend the most on dining out. While you value having dinner out in different restaurants, you also like to donate towards social causes and focus on your well-being. Here’s how you could do it - allocate 40% of your extra money for dining out. Devote 30% of additional funds for donating towards social causes and the remaining 30% could be utilized for well-being workshops. This strategy is not just applicable for extra income but can be incorporated into your base earnings too.
Pay Yourself First Budget
This method prioritizes your savings. Similar to any other budget, you begin by noting down your monthly net income. Next, instead of noting your monthly expenses, you should list your monthly savings goals. Then, subtract your savings target from your monthly net income. The leftover amount can be directed towards paying bills and other miscellaneous expenses.
What to do with your savings?
Now that you have figured out the ways to save your money, it’s also very important to invest it wisely. There are a number of market and non-market instruments that offer good returns for your investments. You should ideally create an investments 'portfolio’ i.e. deploy your savings into a diverse set of investments (equity, debt, gold etc.) to minimize risk.
For instance, mutual funds are an ideal instrument of investment if you plan for long-term wealth creation. Equity mutual funds when selected well tend to deliver good returns. They are reasonably passive and you can keep topping up your investments as you save.
Further, one can also look at the peer-to-peer (P2P) investment instrument to invest in and diversify into debt. If you are someone who gets bogged down by the volatility in the stock market, then P2P lending is the way out for you. P2P has offered an opportunity for people to diversify their portfolios with an alternative investment instrument that offers higher returns, regular and stable income, and compounding returns.
Irrespective of which strategy you use to save and invest money, it’s paramount to have a framework that enables you to track and achieve your financial goals. Budgets may seem restrictive at times, but the savings give you the added benefit of planning out your future goals in a better way.
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