Sometimes we wonder that what is the relationship between Budgeting and Financial Planning. Is there any difference between these two? Let us understand now.
Budgeting vs Financial Planning:
The goal of Financial Planning is to create financial roadmap for your entire life. While Budgeting is a process to track income and expenses on a regular basis such as weekly or monthly. We can say that Budgeting is one of the initial and most important steps in financial planning.
Importance of Budgeting in Financial Planning:
Budget planning helps you to allocate financial resources to cover different expenses, such as housing, food, clothing, transportation, entertainment, savings, healthcare, insurance and investments. This also involves identifying areas for cost-cutting, and adjusting the budget as needed.
Even though the concept of budgeting is simple, many of us fail to execute it efficiently and struggle to save money for future. This happens when we do not prioritise our expenses or neglect to review it time by time.
A budget is telling your money where to go instead of wondering where it went.
Dave Ramsey
With proper budget, you are less likely to waste money on unnecessary expenses and it helps you saving money ultimately. After all, If you do not save enough, how can you invest enough and how will you take a step towards achieving your financial goals.
Evaluate your financial situation:
Do you effectively manage your money, or you need to improve your budget planning? Here are a few questions you can ask yourself to evaluate your financial situation:
- Did you fail to create plans for personal or family expenses?
- Do you find that, as a salaried employee, you have little or no money left for your expenses at the end of each month?
- Do you find that your expenses tend to increase unexpectedly as your income rises?
- Are you having difficulty saving the planned amount of money?
- Is your emergency fund insufficient?
- Would you have to borrow money or go into debt in case of an unforeseen situation?
If you have answered yes to any of the above questions, it is advisable to give more attention to budgeting.
Budgeting Rule – 50-30-20:
The 50-30-20 budgeting rule is a popular budgeting method that most of experts suggests for managing your finances. It says that:
- 50% of your income should spent towards your Needs: Housing, Groceries, Utilities and other essential expenses
- 30% of your income should spent towards your Wants: Entertainment, restaurants, hobbies, vacations, and other non-essential expenses.
- 20% of your income should spent towards savings: Building an emergency fund, contributing to retirement accounts, and paying off any debts you may have
There is no strict guideline and you can adjust it to suit your personal circumstances. For example, when we start our career, it could be hard to save 20%. On the other hand, when we have spent 10 or 20 year in our career, it could be possible to save beyond 50% as well.
The idea behind budgeting rule is to control your expenses and develop the habit of saving as soon as possible. It is fine even if you start saving with 1% initially.
How to control expenses and save money?
Unnecessary expenses are the primary reason why most people find it difficult to save money. One common recommendation is to track your expenses to see if your are spending too much on particular kind of goods or services.
Another recommendation is to keep your savings first in priority to prevent overspending.
Do not save what is left after spending, but spend what is left after saving.
Warren Buffett
In addition to these general recommendations, let us discuss overspending related to online shopping.
Today, in the digital world, buying things online is very convenient. With quick online payment, the cost of those items does not pinch us at the time of purchasing. We do not realise but often we buy things that we do not actually need or those does not fit on our budgeting plan.
Do you feel the same? Let’s do a self-check:
Take a look at the items you’ve ordered from your shopping portal in the past one to two years. How many of those items have you actually used, and did they make any significant difference in your life? If you regret purchasing many of those items, we have a few simple tips to avoid these expenses.
Do not buy immediately:
We easily gets attracted by various products listed on shopping cart such as electronic gadgets, lifestyle and personal case products, and home appliances. We feel the urge to buy something specially when salary gets credited in our account.
Do not immediately buy items online and and hold your nerve for few days. See if you actually need it or it was just an instant thought that you wanted to satisfy. Accordingly, you can take wiser decision to buy or discard them.
Buy from Cash:
Instead of buying online, go to market with cash. It will pinch you when you give thousands of rupees as a cash. You will think twice if that item is actually worth buying.
I know that it is not always possible to do it when you have convenience place order while at home in few seconds. Atleast before placing order, you can imagine going to market and buying that same item with cash. You will feel the difference if it is really worth buying or the buy decision was inspired from online convenience.
These simple tips will help you to become aware of the financial mistakes that you may be making unconsciously throughout your life.
Financial Planning is for everyone:
Some people claim that “I have a good salary or income. I can conformably buy things I need as well as I want, so I do not need to worrying about budget planning.”
Things are never certain in life. You do not know if any emergency situation may demand a lot of money in future and you do not have any income source. Therefore, always have a budget plans for such emergency situations.
Budgeting is not just for people who do not have enough money. It is for everyone who wants to ensure that their money is enough.
Rosette Mugidde Wamambe
We have learned few ways to save money with these budgeting tips. However, saving alone is not enough. In the previous chapter, we have already discussed how our value of money decrease with rising inflation each year. Therefore, we need to grow our saved money via investments.
We will explore various investment options in next few chapters.
Top reference and resources:
Checkout some of the best resources available on the same topic.
- https://www.youtube.com/watch?v=C49nSjzg1iw&t=1s&ab_channel=AssetYogi
- https://www.youtube.com/watch?v=7-2dKzOG1pM&ab_channel=CARachanaPhadkeRanade
- https://www.youtube.com/watch?v=jNovmuAfYOY&ab_channel=pranjalkamra
Disclaimer:
We are not Sebi Registered. Investing and trading in stock market, future and options, mutual funds, cryptocurrency, involve substantial risk of loss. Any such discussion or information provided here is for educational purposes only and before making any investment decisions, please consult with a financial advisor.
