6-Step Guide to Create a Budget For Your Money

This article originally appeared on Entrepreneur website.

A budget to your money is what traffic rules are to control the flow of traffic on roads. Not following either can result in a disaster.

Creating a budget not only limits your spending but helps save for your goals in a disciplined manner. Here is a step by step guide to help you create a plan for your money.

Step 1: Note Your Net Income

Your net income is not just your monthly salary but also rental income, interest dividends or any other extra funds you get regularly.

This exercise will ensure that you don’t let your rent or any other income sit idle in a bank account or alternatively, frivolously spend it without realizing. By including all other incomes other than your salary in the overall budget, you will be able to put it to better use by streamlining it with your finances.

Take note to not include windfalls, like a yearly bonus or gifts, in this as it is unpredictable income and you don’t want to depend on it for your monthly budgeting.

Step 2: Track Spending

Next step is to find out how much are you spending each month. You can do this by checking three months’ of credit card bills, grocery bills, utility bills and bank statements.

Once you have past expenditure records, categorize them to know how much are you sending where. Broad categories could be utilities, emergency and discretionary.

Through this exercise you will know the areas where you might be overspending and where to make adjustments.

Step 3: Create Spending Categories

In this step, you will give each rupee in your pocket a name.

Start with how much do you want to save. Saving should always be done before spending and not with the leftover amount at the end of the month.

Next, list out fixed expenditures—bills, groceries, commute, rent, insurance premiums, loan installments—and allot a fixed amount to each head. Make sure to cap each category. For instance, rent and utilities should not exceed 50 per cent of your salary, whereas EMIs should not be over 25 per cent of your salary. A minimum 10 per cent should go towards saving.

With the leftover money, create a separate budget for discretionary spends.

Step 4: Create Debt Repayment Strategy

Debt can be the biggest burden on your expenses, if not planned well. While loans for funding education or buying a house are good loans, personal loans and credit card rollover are the most expensive type of debt that should be paid off on priority.

Allot highest permissible amount to EMIs going towards a personal loan so that it can be paid off at the earliest. You can cut your budget under discretionary spends and use it for repaying debt. If you have a pending credit card bill, save money and pay it off completely before the interest balloons further.

Windfalls and gift amounts must be used to pay off a part of the debt, wherever possible.

Step 5: Set Goals for Saving

Just as you have done for expenses, you should categorise your saving as well. List out short-, medium- and long-term goals and determine the corpus you will need for each goal.

By estimating the total corpus, you will know how much you need to save towards each goal every month to collect the desired amount.

While short-term goals could be a vacation, an emergency fund, or a gadget, medium to long-term goals will be your retirement, child’s education, car or higher education. Here, investing you savings by following asset allocation will be a good idea to grow your money.

Step 6: Automate Savings, Spending and Investing

This step is important to ensure that you stick to your budget.

You can automate your investments at the start of the month so that the amount allotted for savings is set aside before you start spending. Similarly, automate your bills wherever possible to avoid defaulting on any payment.