Slowdown in economic growth and surging inflation across the world has left people dealing with rising expenses and overall financial uncertainty. In such an environment, planning finances carefully becomes an important strategy for households. Setting up a monthly home budget allows you to track your spending and savings, thus letting you curb unnecessary spending and achieve not only immediate, but long-term financial security.
Now that we have understood the importance of having a monthly home budget, let’s discuss how you can actually create and manage one in just 6 simple steps.
The first step in creating a home budget is to calculate how much you earn each month. This figure is the starting point as it determines how much money you really have to plan your budget with.
To calculate your monthly income, include all your steady sources of income, such as income from your full-time employment and any steady rental income. Avoid including one-off income sources, such as money received from selling a car etc.
Important to note is that you should always calculate your net monthly income - the income after accounting for taxes and other deductions - since this is the money you get to take home and use.
Understanding where you spend your money is a crucial step in creating the budget. To do so, track your spending over the previous few months. You could use your bank account statements, credit card statements, and receipts for this purpose.
Doing this will help you gauge your spending habits, categorize your expenses, and give you a clearer picture of what you need to budget for.
Don’t forget to take into account expenditures that are not monthly and might occur in bulk at some point in the year, for example, travel expenses, taxes, visits to the doctor, etc.
Once you have analyzed your spending habits, it will shed some light on what you’re spending your hard earned money on, and how it aligns with your personal goals and priorities.
You could be planning to take a big family vacation, start a business, take up a fulfilling hobby, fund your child’s education, or build an emergency healthcare fund. Take these into account, along with your regular expenditures, and create a timeline of how much money you will need and when.
Budgeting doesn’t mean you only plan for spending on the essentials. It's equally important to allocate your income across all things that add value to your life.
Having understood where you currently stand and what you will need in the future, it’s now time to actually create your budget. The 50/30/20 rule is the most widely used method of creating a monthly budget.
According to this rule, 50% of your net income should be spent on your needs. These include housing, groceries, utilities, transport, healthcare, childcare, insurance premiums, and loan payments, among others. Such expenditures are necessities that you cannot avoid.
Out of the remaining half, 30% of your income should be allocated to wants. These are expenses that contribute towards maintaining your quality of life and can include clothing, dining out, movies and events, gym membership, travel, and content streaming services.
The last 20% of your income should be your savings. This corpus is meant for your retirement, emergency expenditures, big ticket purchases (home or car), and other investments.
Budgets aren’t set in stone. As much as you should try to track your spending and stick to your monthly budget, it is also important to refine your budget regularly. Your life circumstances could change - you could get a pay raise or you might need to take a loan for an unexpected expense, all of which could lead to increase in income or expenditure should be reflected in your home budget.
Savings are a crucial part of your budget and overall financial planning. Saving consistently can be a hard practice to follow, but if you can be disciplined, it can offer you peace of mind and make sure you’re prepared for a rainy day
Saving money doesn’t necessarily mean you let it sit idle. Investing it can be a great way to build personal wealth and secure your future. If you’re new to investing, start small and focus on sensible investments. Tools like Systematic Investment Plans (SIPs) help you invest regularly and build a habit without having to spend too much time or energy. Over time, you can look to diversify your investments across instruments such as stocks, mutual funds, bonds, fixed deposits, pension schemes, and others.
It is imperative that you opt for health and term insurance policies that will protect you and your loved ones against any unforeseen medical events. Adequate insurance coverage can help reduce risk and also be tax efficient. The younger you start, the lower premiums you will have to pay for such policies.
Tax planning is an effective way to reduce your tax liabilities and increase your take home income. You can minimize your taxable income by investing in government schemes, opting for insurance, taking home loans or leveraging other standard deductions.