How preparing a personal budget helps you save more

The biggest challenge many of us face about investments is finding enough surplus funds. Most of the time we are engrossed in balancing our income and expenses. Drawing up a personal budget allows you to take control of your spending and find enough money to save and invest for vacations, retirement and your children’s education.

We can save some money even if a major portion of our income go in servicing various debts – home loan, personal loan EMIs or for that matter Credit Card bills – we have accumulated. As Warren Buffet advises, you need first set aside money for investments before thinking about spending it. You don’t need a million to start investing. You can start with a humble sum of Rs.500 per month and see it grow. After all contributing small sums of money regularly to Systematic Investment Plans means Smart Investing

Why do you need a personal budget?

The personal budget helps us plan our income and expenses better and create scope for that little something that we can save or invest. You can choose from a verity of online tools or can use a simple Excel sheet for managing your income and expenses. All you need to do is to record them on a regular basis. This will not only help you monitor your expenses but will also help you in identifying your wasteful expenditure creating the much needed surplus for investing.

If you do not prepare a personal budget, well, nothing much will happen but you would not be in a position to meet your long term financial goals. Even if your income rise in future, it is likely that your expenses will outpace your income. This way you will always be on your toes to manage your income and expenses. That surplus money for investment will always remain an illusion.

How to start a personal budget?

Our friend Sherin in his latest post ultimate guide to budgeting secrets explains that personal budgeting is not a single hour or day process. Time is the major element helps people to identify all necessary requirements.

You need to be clear about your goals and need to create funds for meeting them. The objective with which you start a personal budget is very important to design a budgeting pattern that suits your requirements.

If you are struggling to meet your expenses from your sources of income, the objective of your budget is to find ways to generate enough surplus for investment. For this try to fix a cap for each type of expenditure that you incur. Cut down your incidental expenditure and find ways to minimize others. This will be a difficult task at the beginning but your efforts will start giving fruits by generating a surplus out of the fixed corpus. Set your self a target to save 10-15 per cent of your monthly income every month.

If you already have a surplus income after meeting your monthly and annual financial commitments, you may still want to minimize your unnecessary expenditure and start generating a larger surplus. Your target now should be increase your monthly saving potential to 20-35 per cent of your monthly income. Here is when you can start allocating your surplus funds to work for your long term goals.

Allocate 70-80 percent of your surplus for long term investments (investments with a time horizon of 5 to 10 years) and balance 20-30 per cent to short term contingency funds. While money in your bank account and bank fixed deposits could be good to serve your short term objectives, for better realization of your overall financial goals you may need to deploy your funds to long term investment instruments such as a Mutual Fund or a Retirement Pension fund. This will help you prepare a solid foundation for your retirement as explained in our earlier article Retirement Planning – Start now, Save more, Retire rich

Conclusion

Drawing up a personal budget is the first step that you can take to fulfill your long term financial goals. Over the years, as your ability to save improves you can make an effort to allocate a higher percentage of your income towards investments. This will accelerate your progress to achieve the long term target you set for yourself.