Best Budgeting Formula - How much you should save?

Let’s go back to some 30-35 years and see how our elders, with limited income, or rather, with just one person’s income, could provide for the whole family with the best of things. Be it building the house or sponsoring your education without taking loans, they had done everything. Whereas we, in current times, get a mini panic attack just by thinking about buying our own house or that Tomorrowland ticket that we all have dreamt of at some other time.

The real answer lies in the budgeting. Let’s dive into this article and understand how to do this without sacrificing our lifestyle.

What is budgeting?

Budgeting is a process in which one can segregate their after-tax income into buckets of utmost importance (NEEDS), savings, and leisure (WANTS) and then spend the amount accordingly. Let’s clearly understand how to start budgeting and how we can classify our expenses into different categories, and as experts suggest, follow the 50-30-20 rule. (50% in needs, 30% in wants, and 20% in savings).

The way to good budgeting is to overestimate your expenses and underestimate your income by making realistic goals. One cannot predict every expense that may arise, and it's always good to have a surplus income.

Why is budgeting important?

The overall motto of our lives should be to earn well by keeping a healthy balance between today and tomorrow. One can enjoy today and also plan for tomorrow's unforeseen circumstances or retirement.

Budgeting will help you in:

• Getting a 360-degree view of your financial standing
• Curbs excessive borrowing
• Fulfiling financial goals
• Reduce money-related stress
• Planning for unforeseen circumstances

A step-by-step guide to creating a budget:

1) Calculate your income:

This will help you know how much money is to be parked under different heads and will help you sustain. Make sure you consider your after-tax salary for budgeting.

2) Identify the expenses:

This part will be of great importance as it will act as a foundation for splitting the funds into different sections. It might take some time for one to identify which of the expenses are of utmost importance and which aren't and make adjustments as per that.

Let's simplify this for your ease.

Types of expenses:

i) Needs:

These expenses are of the utmost importance and should be prioritised. At least 50% of your utmost expenses should go under needs. A few of the examples are

• Rent
• Groceries
• Transportation
• Basic utilities
• Insurance

Maximum weight is given to these expenses, as they can't be avoided, and failing to pay them will affect your overall moto of earning.

ii) Saving:

This expense head should be prioritised after the needs with 30% weight. A lot of experts would differ here by giving it only 20% weight, but according to me, it should be 30%.

20% of this amount should go under the savings section, which is for those expenses that might seem small now but will look huge in the future. 10% of this amount should also be parked in an emergency fund account.

iii) Wants:

We human beings have different aspirations, which are little luxuries in our day-to-day lives that help rejuvenate us. 20% of the salary should be spent here for the overhaul of our system. A few of the examples are:

• Shopping
• Dining out
• OTT Subscriptions
• Holidays
• Spa sessions

The above 50-30-20 formula helps individuals organise their income in comparison to their expenses and plan the month as a whole.

3) Plan the budget allocation:

Everyone has different lifestyles and approaches to managing funds. One might be comfortable with the 50-30-20 formula, and one might not. The ratio can differ from one to another, as one shirt doesn't fit all.

I use the 40-40-20 moto, wherein 40% of my income is towards my needs, 40% in savings (20% savings and 20% emergency funds), and 20% on wants.

4) Track your progress:

Keep a check on your budget to know exactly where you stand at the month's end. If things don't look promising, then you can make some adjustments by increasing or decreasing the fund share slightly and watch out for the coming months.

For tracking the budget, you can either opt for the traditional way of writing down every expense in a diary (like our parents did) or use a spreadsheet or various apps available in app stores. (more like a GenZ way)

You might not get the perfect budget allocation in the first place, but some small tweaks here and there and most importantly, sticking to it will give you positive results in the future.

Tips to stay on track for budgeting:

Here are some hacks that can help one stay on track with their budget:

1) Make good use of sales:

Plan things you need by writing them down and buying them on sale by using coupons. In that way, you can save some extra bucks and use them at some other place. Thrift shopping is also widely accepted and is a good decision to try.

Also, buy groceries weekly or bimonthly, as that will also help you save some money.

2) Use cash to pay wherever possible:

It's a common tendency that one will spend less and only on relevant things once paying through cash rather than debit or credit cards. It is mentally difficult to pay a lot of cash at once rather than swipe a card, as in the case of debit and credit cards, one does not get to see their bank balance then and there only.

Since we discussed some hacks to stay on track, it's better to discuss some common mistakes to avoid.

Common budgeting mistakes to avoid:

1) Making unrealistic goals:

remember, budgeting is not a once-or-a-year activity so you can't fool yourself by making unrealistic goals. The basic motto of a budget is to help you plan your expenses for the long run, so putting up realistic goals will only help.

2) Avoid impulsive buying decisions:

Impulsive buying has been an old enemy of our wallets, and we all have fallen into this trap some or the other time. It's better to plan and think about whether it's worth buying now.

Will buying a pair of Birkenstock or Jordans be worth it if you are on a tight budget and haven't saved anything? Give it some time, and if is of importance to you, then you will plan ways to save that extra amount for the purchase.

3) Not giving importance to wants:

In current times, one cannot build a good budget if they don't keep some funds for their wants, as in the long run, you will end up being frustrated if you don't do so. Going out with friends for dinner or spending some time doing that activity that you have longed for is also required.

Conclusion:

One may find it difficult to survive once starting with budgeting, but in the longer run, prioritising and adjustment will fetch positive results in securing your today and tomorrow.