How to Create a Budget to Understand Your Spending

Budget is one of the important personal finance tools that helps an individual track and understand his spending. It helps him know where his money is going and what his financial position is. This information is crucial for him to keep his spending under control and helps him save money for financial needs, either short-term or long-term.

So, in order to reach your set financial goals, you need to first create your personal budget. In this article, we will discuss on how to create a budget and the areas you need to control spending.

Step 1: Know your monthly income
This is the first step in creating your budgeting. Whether you are a self-employed or a working individual, you need to know your monthly income. In order to know how much you are spending, you need to know how much you are making each month. Put all the sources of your income at one place and add up. Include all the sources of income including your salary, your spouse’s salary (if you are married), rents, and interest from your savings account.

Step 2: Make a list of all expenses
After getting a clear idea on your monthly income, you need to track all your expenses and put them at a place. This can be done by tracking each and every expense you make. Classify all your expenses into different categories, so that it becomes easy for you to know where you are spending the most.

  • Food expenses – money spent on milk, groceries, oil, etc.
  • Utility expenses – utilities like electricity, water, gas, phone, television cable, etc.
  • Education – monthly fees, bills of extra books purchased, tuition fees, etc.
  • Clothing – laundry, clothes purchased, etc.
  • Housing expenses – house rent, furniture, etc.
  • Travel expenses – car maintenance cost, gas and oil bills, car insurance, licence and taxes, etc.
  • Medical/health expenses – insurance, monthly check-up bills, monthly medicine costs, etc.
  • Contingency expenses – hospitalisation expenses, vehicle repairs, home repairs, etc.
  • Entertainment expenses – restaurant bills, gifts, etc.
  • Other fixed expenses – loan payments, credit card payments, etc.

The above mentioned categories are generic; and the number and types of categories vary from person to person. One thing you need to remember is to track even a small expense – it may affect your savings.

Step 3: Prioritize your spending
After tracking all your expenses, prioritise them as necessary and discretionary expenses.

  • Necessary expenses: These expenses are made based on your basic needs and requirements and hence, these are also called living expenses. For example, money you spend on groceries, utilities, insurance, medicines, transportation, debt payments, etc.
  • Discretionary expenses: If you have made any expense based on your ‘wants’ rather than ‘needs’, then such an expense is called discretionary expense. These expenses are not necessary for your survival. For example, money you spend on vacations, eating out, cosmetics, birthday gifts, luxury clothing, etc. These expenses are completely for entertainment and recreational purposes.

This step is very crucial because it lets you know your spending behaviour – whether you have made necessary expenses or unnecessary expenses. Reduce unnecessary expenses to save some money for emergency needs.

Step 4: Calculate surplus or deficit
Now, you need to add up all the expenses that come under living expense category and all expenses that come under discretionary expense category. Subtract these two types of expenses from your income.

If the amount is a negative value, then you are in deficit. If the amount is a positive value, then you have generated some surplus, which can be used for savings.

Creating your own budget plan according to your needs is better than downloading budgeting software. You can use spread-sheet to create one. Living without a budget is like driving a car towards unknown destination. A clear budget will help you attain financial stability. So, create a good budget and stick to it.

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