Creating a monthly budget is an important skill that not only helps you control your expenses but also leads you towards financial stability and achieving long-term goals.
Here we present a step-by-step guide to creating an effective monthly budget.
1. Assess your income
First of all, it is important to understand what your monthly total income is. This can include your salary, freelance income, business revenue, or income from other sources.
Why is it important?
Knowing your income accurately can help you understand how much money you have available for essential expenses and savings. Spend according to your income
Example:
- Salary: ₹40,000
- Part-time income: ₹10,000
- Other sources: ₹5,000
- Total income: ₹55,000
2. Identify essential expenses
Essential expenses are those that are necessary to fulfill your basic needs. Give priority to these expenses. These can also be called “fixed” expenses, as they are almost the same every month.
Key essential expenses:
- Rent/EMI: ₹15,000
- Groceries: ₹6,000
- Electricity, water, and internet bills: ₹3,000
- Transportation: ₹4,000
- Health insurance: ₹2,000
- Total essential expenses: ₹30,000
Tips:
- If the rent is high, consider sharing with roommates.
- Use energy-saving appliances to cut down on electricity bills.
3. Determine optional expenses
Optional expenses are those that are based on your wants, not needs. It is extremely important to keep them under control.
Examples of optional expenses
- Entertainment: ₹3,000
- Restaurants and cafes: ₹2,000
- Shopping: ₹2,000
- Total optional expenses: ₹7,000
Management tips
- Fix an “entertainment budget” every month and do not spend more than that.
- Avoid buying unnecessary things in online shopping.
4. Prioritize savings
Prioritizing savings is a healthy financial habit that helps you avoid uncertainties and achieve long-term goals. Saving 20-30% of your income is considered ideal, but this can be adjusted according to your financial situation and needs.
Key areas to use savings
1. Emergency fund
This fund is essential for unexpected expenses (e.g., medical emergencies or job loss). Experts recommend that it should have a provision for at least 3-6 months of expenses.
2. Investments
Investing in mutual funds, stock market, or SIP (Systematic Investment Plan) helps you grow your wealth and reduce the impact of inflation.
3. Retirement planning:
Investing in NPS (National Pension System) or PPF (Public Provident Fund) can help you make your old age financially secure.
Tips to increase savings
- Set up automatic savings: Automatically transfer a portion of your income to a savings account or investments.
- Cut down on unnecessary expenses: Identify and reduce non-essential expenses.
- Set a savings goal: Link savings to a specific purpose (e.g., buying a house, vacations) to make it motivating.
- Do freelance or side hustle: Savings can be further increased with additional income.
Remember, savings grow bigger gradually, and it strengthens your financial independence and self-reliance.
Savings Plans
- Emergency Fund: ₹5,000
- Mutual Fund/SIP: ₹5,000
- FD/RD: ₹3,000
- Total Savings: ₹13,000
5. Set Goals
Set monthly and yearly financial goals to make your budget more effective.
Goal examples:
- Saving ₹1,20,000 in a year
- Creating an emergency fund of ₹30,000 in three months
- Investing ₹50,000 in six months
Benefits of goal setting
- Gives direction to your financial efforts.
- Avoids unnecessary expenses.
6. Use budget tracking apps
Use technology to track your progress and keep track of your expenses.
Popular apps:-
- MoneyView
- Walnut
- Goodbudget
- YNAB (You Need A Budget)
Benefits of apps
- Record all expenses in one place.
- Get automated analysis and reminders
7. Prepare for irregular expenses
Sometimes situations arise that require extra money. For this, keep a “flexible fund” aside.
Examples of irregular expenses:
- Medical emergency: ₹2,000
- Gifts and celebrations: ₹2,000
- Total: ₹4,000
Tips
- Contribute a small amount to a flexible fund every month.
- Use these funds only in case of emergency.
8. Review your progress
Review your budget at the end of every month. Find out if you met your goals or if you need to improve.
Review questions
- Did I keep track of all expenses?
- Did I reach my savings goal?
- Could unnecessary expenses be reduced?
Benefits
- This helps you correct your mistakes.
- You can plan better for the next month.
9. Adopt smart financial habits
Adopt smart financial habits to take control of your money and secure your future. Track your spending, prioritize savings, set realistic financial goals, and make informed decisions to build long-term financial stability.
- Avail cashbacks and discounts.
- Avoid debt.
- Adopt a “waiting period” to avoid unnecessary purchases.
Other tips:
- Use credit cards only when necessary.
- Check your bank statement every month.
10. Maintain flexibility
Don’t make the budget rigid. Adjust it as your expenses and income change.
Flexibility is key to creating a sustainable and realistic budget. Life is unpredictable, and your financial plan should accommodate unexpected changes in income or expenses.
A rigid budget can lead to frustration and burnout, while a flexible budget ensures you stay on track without compromising your well-being.
Why Flexibility Matters
1. Accommodates Unplanned Expenses
Emergencies like medical bills or urgent repairs can disrupt a strict budget. Flexibility helps you adjust without stress.
2. Adapts to Income Changes
If your income fluctuates due to bonuses, freelance work, or job changes, a flexible approach ensures smooth financial management.
3. Supports Personal Growth
Life goals and priorities change over time, and your budget should evolve to reflect these changes.
How to Maintain Flexibility
1. Set a Contingency Fund
Allocate 5-10% of your monthly income as a buffer for unforeseen expenses. This ensures you’re prepared for emergencies without derailing your budget.
2. Review and Adjust Regularly
At the end of each month, review your budget to see what worked and what didn’t. Adjust categories or amounts as needed.
3. Prioritize Needs Over Wants
Identify essential expenses and allow flexibility in discretionary spending like dining out or entertainment.
4. Include Variable Expenses
Factor in fluctuating costs such as utilities or seasonal expenses, ensuring your budget reflects real-life variations.
5. Use Envelope Budgeting
Assign a specific amount to different categories (e.g., groceries, leisure) but allow movement between envelopes if necessary.
Examples
- If your income increases, increase the percentage of savings.
- If an unexpected expense comes up, cut down on other expenses.
Conclusion
Making an effective monthly budget is a process of discipline and self-control. By planning properly, you can not only handle your current expenses, but also secure your future. Remember, small steps make big changes.
Key points
- Understand your income and expenses.
- Prioritize savings.
- Use smart apps and financial tools.
If you follow these tips, your monthly budget will be more effective and manageable.
