Contrary to what many may perceive, budget is not just meant for mathematical nerds or analysts, rather budget building is for everybody. Building a monthly budget primarily involves a three-step process. Firstly, one must learn how to manage finances and should aim to become self-sufficient at a young age. Secondly, one must learn how to reduce taxes. Thirdly, one must learn how to cut down expenses. To provide a simplified framework for budget building, Mr Gaurang Sanghvi, Digital Head, DSP Mutual Fund, recently addressed a session in Thrive 2021– an event organised by stocks and mutual funds investments platform Groww.
To get started on building a monthly budget, Mr Sanghvi explained that one should not steal from the future for current gratification. This simply means that we must rationalise our spending and think properly before buying anything. Thinking one night before we buy anything, might lead to delaying the purchase. Our current savings equals our future earnings. Along with this, one must remember that in the long-term, wealth will matter and not status. This means that we must not chase status, but wealth. Status is temporary and wealth is permanent.
One must also inculcate discipline in terms of compounding. Habit and patience equals compounding. One must make a habit to save money, also have patience in investing. One can take advantage of compounding only with a combination of habit and patience. In this regard, people should keep money invested for long-term, and that invested money should be something that one does not want or need or would like to see. Compounding will work if one keeps investing and reinvesting in people, work, cities. This way the money will grow over time through a holistic process.
During the event, Mr Sanghvi said that the first step is to build a budget. A budget is a written record of the money that flows in and flows out of one’s household or pocket every month. It involves balancing income and expenses. One must start budgeting as early as possible and not wait until one is financially strong. A budget is nothing more than the activity of balancing income Vs expenses.
Budgeting: What is it and how to budget?
Building a budget involves the following steps:
-Define needs and wants
-Define expenses: both essential and non-essential expenses
-Calculate your weekly budget
-Set up an emergency fund: Save ‘x’ amount by the end of a month or year
Needs: food, housing, medicine, hygiene, utilities, education
Wants: movies, vacations, malls, restaurants, shopping, parties
Creating a personal budget involves tracking expenses, figuring out the money that one is spending, and noticing what one is spending that is not a necessity? According to Mr Sanghvi, there are two types of expenses:
Essential expenses: have to have in order to live
Non-essential expenses: don’t have to have in order to live – extra online shopping etc. Does one really need that product?
In terms of essential expenses, there are two types:
Essential ‘Fixed’ expenses:
Mortgage or rent
Insurance – auto and home
Essential ‘variable’ expenses:
For variable essential expenses, one must think about how much and when one needs it: