Financial freedom cannot be achieved without budgeting. Budgeting involves tracking your sources of income and more importantly tracking your expenses. It is novel tool for controlling your expenses and making you aware of how you spend your money. At the outset, budgeting may seem to be onerous and boring, particularly for those of us who hate numbers. But once you realize the benefits emanating from it, you will find it an interesting exercise. Even businesses, whether small or large, use budgeting as a tool to achieve their financial goals. It is, in fact, an integral part of managing an organization.
Benefits of budgeting:
Helps to control impulse buying.
Helps to control your expenses.
Ensures that you pay your bills on time.
Helps you to borrow money when you need it.
Helps you by not defaulting on your loan repayments, thus, protecting your credit rating.
Helps you to save money which can routed to different investment vehicles that can in turn help you build your net worth over a period of time.
The budgeting process
The first step in the budgeting process is to determine your net worth.
Your net worth = the value of all your assets less all the liabilities or loans that you owe.
The second step is to identify your sources of income and the amount from each source. Your sources of income could be salary, business income, investment income such as dividends, interest, rent. Your most recent tax return and bank account can be an excellent source for identifying your income sources.
The third step is to identify your expenditure items such as groceries, entertainment, mortgage payments, loan repayments, housing repairs, transportation, taxes.
Prepare a spreadsheet with the following columns: a) description for each item in the two sections viz. income and expenditure b) actual amount c) budget amount d) difference (between actual and budget amount) e) reason to be given if the actual amount exceeds the budget amount.
It is very important to ensure that you provide at least 10% of your gross income towards savings. A formula should be in place in your budget spreadsheet that will automatically calculate 10% of your gross earnings. The objective of budgeting will be defeated if it does not lead to targeted savings.
Budgeting should generally be done on a monthly basis. It is very important for you to enter all the amounts that you spend into the spreadsheet. This will require a disciplined approach but in the long-run, it would definitely be worth it. Keep a separate paper file for each year divided into sections based upon the items of income and expenditure for filing your bills.
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