how to budget monthly expenses

How to Create a Monthly Budget to Manage Your Finances Effectively?

We've all been there - staring at our bank statements in disbelief, wondering where all our hard-earned money disappeared. Does your income vanish into thin air, consumed by never-ending bills, unplanned expenses, and impulsive buys?

Don't worry; you're not alone. In a world where digital transactions are the norm, losing track of your spending habits is easy. Fortunately, the solution lies in an effective monthly budget planner.

In this blog, we will unravel the secrets to creating a monthly budget that can help you take control of your finances, all while putting your money to better use.

Why do you need a monthly budget?

First and foremost, let's dive into why having a monthly budget is so essential. Creating a monthly budget is like setting up a roadmap for your finances. It guides you, ensuring you know exactly where every penny is headed.

  • Visibility into spending habits: You get a crystal-clear view of where your money is going.
  • Cash flow management: Knowing your income and expenses helps ensure you're not spending more than you earn.
  • Savings & investments: Once you know how much you have left after your expenses, you can invest wisely.

Let's understand this using an example:

Rahul earns a Rs.50,000 salary but never seems to have enough money at the end of the month. After creating a monthly budget, he realised he was spending Rs.10,000 on dining out and entertainment. Now, he allocates just Rs.5,000 for leisure, freeing up an extra Rs.5,000 for savings.

Steps to create an effective monthly budget

Creating a budget might seem tedious, but the payoff is worth the effort. Here's how to make a monthly budget that works for you:

List your income sources

The first step is simple - jot down all your income sources. It could be your salary, freelance gigs, or even side hustles.

  • Salary: Your monthly take-home pay.
  • Side Hustles: Any additional money you make on the side.
  • Investments: Interests, dividends, etc.

Detail your expenses

Now, it's time to zoom into those expenditures. Don't leave anything out, no matter how trivial it seems.

  • Fixed expenses: These are bills that are the same every month, like rent and EMIs.
  • Variable expenses: These fluctuate monthly - think groceries, fuel, and entertainment.

For instance, Seema noted all her expenses and realised she was spending Rs.2,000 a month on coffee alone. That's Rs.24,000 a year on just coffee!

Must Read: Account Payee Cheque - Meaning And How to Issue

Allocate money for each category

Now comes the exciting part - deciding how much you want to spend where. This is where the monthly budget planner comes into play. You get to set limits, helping you avoid frivolous spending.

  • Necessities: Around 50% of your income should go here.
  • Savings: Aim to save at least 20%.
  • Wants: The remaining 30% can be spent on things you desire but don't need.

Use tools & resources

Nowadays, there's an app for everything, including budget planning. Some people prefer old-school spreadsheets, while others opt for free mobile apps that sync with their savings accounts.

  • Spreadsheet software: Good old Excel or Google Sheets can be very effective.
  • Budgeting apps: Many apps categorise your spending and even send alerts.

Review and adjust

No budget is set in stone. Life happens, and you must be willing to adjust your budget to accommodate unexpected expenses.

  • Monthly review: Make it a habit to review your budget every month.
  • Emergency funds: Allocate some funds for emergencies and unexpected expenses.

Let's take Anil's example. After making and following a monthly budget for three months, he found that he could save an extra Rs 3,000. He decided to invest this amount in a Kotak digital savings account with the ActivMoney feature to earn FD-like interest, not only saving the money but also growing it.

How to budget monthly expenses 7 save more?

We've talked about budgeting, but how can you use it to save more? Here's the trick-automate your savings. By setting up a standing instruction to transfer a fixed amount to a high-interest savings account, you can grow your assets effortlessly. For instance, Kotak811 offers a zero balance savings account that can be opened online. Imagine the convenience of achieving financial goals without paperwork or waiting time!

Pitfalls to avoid while budgeting

Now that you've successfully created your monthly budget, you must know the common mistakes that can throw you off track.

Failing to account for seasonal expenses

While it's easy to remember your recurring monthly expenses, people often overlook seasonal expenditures such as festival shopping, summer vacations, or winter heating costs.

  • Festival expenses: Diwali, Holi, and other celebrations can be costly. Plan for them in advance.
  • Vacations: Holidaying can burn a hole in your pocket. Start saving months before your trip.

For example, Pooja failed to account for Diwali expenses and ended up overshooting her budget by Rs 10,000. From the following year, she started setting aside Rs.1,000 every month specifically for festival expenses, ensuring she could set aside enough for Diwali and more! 

Overestimating savings

You might be optimistic and allocate a large portion of your income to savings. While this seems like a good problem to have, overestimation can create an unrealistic budget.

  • Realistic projections: Use past behaviour as a guide for what you can realistically save.
  • Incremental increases: Start small and gradually increase your savings goal.

Must Read: 7 Compelling Reasons Why Having A Savings Account

Neglecting to revisit and revise

The "set it and forget it" approach can be disastrous for a budget. Always revisit and revise your budget to accommodate life changes.

  • Career changes: A promotion or job change will have a significant impact on your income and possibly your expenses.
  • Major life events: Marriage, having a child, or buying a home will necessitate budget adjustments.

Ignoring small expenses

Small expenditures, often termed as 'pocket money,' can significantly impact your budget.

  • Daily expenditures: The Rs 50 you spend daily on snacks sums up to Rs.1,500 a month.
  • Subscriptions: Streaming services, magazine subscriptions, and similar small but recurring expenses should not be ignored.

Example: Sunita was surprised to find that she was spending Rs.1,200 a month on magazine subscriptions she barely read. Cancelling a few of them freed up cash for her savings.

Summing Up

Congratulations, you've just set up an effective monthly budget! Now, all you have to do is stick to it. Budgeting is less about number-crunching and more about understanding your financial habits. It empowers you to make informed decisions, giving you the confidence to move forward with your financial goals.