We have entered financial year 2023-24 and at this point, most people might be planning to make some new resolutions. Among these, financial pledges related to investments and tax planning of all sorts are generally high on most promise lists. However, it's vital to understand that to achieve financial stability, one must first have budgeting in place.
Budgeting not only helps in planning for expenses, uncertainties and long-term goals, but it also ensures that there is no overspending, which can otherwise lead to stress and anxiety.
Here are 5 tips that one can use to develop a good budgeting discipline for long term financial security:
Review lifestyle and calculate net income
The first step to create an effective budget is to review current lifestyle and calculate net income.
"Based on this number, one can chart out a monthly or annual budget that is sustainable and efficient enough to cover regular outlays at ease. The net income is the amount that remains in one’s hands after mandatory deductions like taxes, rent, health insurance and other employer related benefits like provident fund," Sidharth V, Chief Risk Officer at KreditBee told CNBC-TV18.com.
Set clear financial goals
Achieving financial goals is the primary purpose of budgeting. Hence, it is imperative to be clear about these goals and choose a budgeting method that works well towards realising them.
The 50-30-20 budgeting method, which states that one should apportion 50 percent of his/her income towards necessities, 30 percent for wants and 20 percent for savings is the easiest and most popular option here. However over and above these aforementioned buckets, one should also take into account retirement planning and any other unfortunate events and strategise accordingly, Sidharth V said.
Pay yourself first
Pay yourself first, is a budgeting principle that prioritises savings and retirement planning before other expenses and discretionary spending. This helps in building a savings corpus that becomes a part of the future wealth or retirement fund.
As per Sidharth V, the approach in question suggests that a definite amount from income be automatically routed towards savings and investments, as soon as it is received in the bank account.
The remainder amount after this is then free to be utilised for any other expenses, as per the requirement.
Settle debts
High interest debt instruments like outstanding loans and credit card bills come with costs that appreciate over time. This leads to a disturbance in the budget. To achieve true financial stability, it is prudent to settle all debts early and avoid taking on new liabilities as far as possible.
"It is a must to follow the 70-20-10 rule wherein the income can be demarcated into three buckets – 70 percent for necessities, 20 percent for savings and investments and 10 percent towards debt repayments," Sidharth V told CNBC-TV18.com.
Regularly track progress
Progress tracking is an important step in budgeting. As income grows, the lifestyle, economic environment around us and priorities also change accordingly.
Thus, keep a regular track on budget and make changes from time to time to reflect any developments within the internal and external environment.
