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How to make a monthly budget

The first exercise in undertaking financial planning is preparing a monthly budget to understand your cash inflows and outflows in the household.

Today we are going to talk about how to prepare a monthly budget. Tools required are an excel sheet on computer/laptop or simply a pen and paper.

First step is to write down the net take home salary that comes in the household every month.

Next step is to note down all the expenses incurred in a month such as – rental, salary to maid/cook/car washer, telephone and electricity charges, groceries and gas/petrol, medical expenses, any emi's on car loan/home loan/personal loan.

Also make sure to keep some amount aside for miscellaneous/ entertainment expenses. This is just an imaginary figure given to all those expenses which are not planned for or entertainment expenses such as – outings, mall visit, movie tickets and some unplanned splurging.

The net amount after deducting expenses from the take home salary becomes the surplus or the investible money which can be invested into various financial instruments as per the goals of the family.

The approach explained above basically makes your savings a variable of your expenses i.e. you first factor in all the expenses and only then invest what's remaining.

The more prudent approach, however is to first save a fixed percentage of the salary and then use the rest of the money to cover your expenses. Using this approach makes sure that you steadily keep putting some decent amount out of your pay check into your savings kitty every month irrespective of your expenses. However, you need to take care of the following things while following this method:

The net amount available to you after deducting a fixed percentage of your savings from your take home should adequately cover all your expenses.
The percentage to be saved every month differs from person to person, the main focus here is to keep up a steady savings rate every month.
Again the savings percentage should be just enough so that you feel a slight pinch while spending on unplanned or splurging items.
Keep a reasonable and adequate cap on the amount allocated to miscellaneous/ entertainment expense but it's also important not to over-estimate this expense.

Benefits of making a budget:

Making a budget is the first step in the overall important exercise called financial planning. It helps you to take control over your money and not let the money control you.
Writing down the expenses on a paper or excel sheet helps in getting a clear idea of where your money is getting spent every month. It helps to identify any unnecessary expense or wastage of money, finally helping you save more in the long run.
Also, you avoid that situation every month end when suddenly your pockets turn empty and you are desperately waiting for the next paycheque to help you tide over.

Take a look at the budget I prepare every month for my family:budget

After doing my savings for the month and also taking care of all possible expenses to be incurred in that month, the net balance left to me is my enjoyment money which I can spend as I please, with no worries for the last days of the month.

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