Creating a budget is the first step in your Financial Independence journey. Sticking to your budget is the next and most important step. If you are a free spender, then it could be very challenging for you. People usually tell me that they do not know, where the money is going. My answer is always like…” track it”. Usually, it does require big efforts to stick to your budget. You need to take the first step and continue for an entire month. Sticking to your budget for an entire month is like a tightrope walk for someone, who has never done this.
So let us assume that you have prepared your monthly budget. 20% of monthly take-home salary for investment/savings and 80% for current expenses. This 80% of current expenses would include Essential and Non-essential expenses. Try to limit your essential expenses to 50% of your take-home salary and 30% to non-essential expenses.
Here are some tips, which will help you to stay on track with your budget target.
Use Cash as far as Possible
Use cash for payments as far as possible for all your transactions. Cash means, you use real money in your account, not the credit card money. Seeing real cash getting deducted from your account or paying hard currency notes by hand has a profound impact on limiting overspending habits. For digital transactions, use UPI or Internet Banking. Since it requires that you can only use the amount available in your bank account, you can never spend more than you have.
Using this technique, you can stick to your budget and avoid overspending. You can also consider using hard cash for payment of non-essential things, such as eating out or entertainment.
Be a Responsible Credit Card User
When you pay for your expenses using Credit Cards, you will feel happier as compared to when you spend hard cash. Since you are not paying from your pocket, you feel like getting it for free. In reality, you have used the Credit Card Company’s money (money on credit), which you have to repay after a month. This is the reason, most of prudent financial planners advise staying away from Credit Cards.
I believe that it is not practical to not have Credit Cards. Credit Cards have their utility. In one place, they help us save substantial money through discounts on products, they also help to build good credit scores. Remember that Credit Cards Are Good Servant But Bad Master.
You have to be more responsible towards Credit Cards usage. You need to squeeze all discounts, cashback and benefits available from a credit card. If you get your salary on a “T” date, change your credit card payment date to a “T+5” date. As soon as you get your salary, pay off the entire credit card bill (without waiting till “T+5”). If a Credit Card is helping us to get a discount on flight tickets, restaurant bills, or e-commerce websites such as Amazon or Flipkart, etc, we must use that Credit Card to get the discount.
There is one Credit Card Trick, which can help you avoid overspending and keep a foolproof track on expenses. The trick is that If you want to spend “X” amount, first check, if you have that much amount in your bank account. If yes, only then use your Credit Card. After the transaction on your Credit Card, immediately transfer the same amount to your other bank account. This amount was saved for next month’s repayment of your credit card bill.
Let us understand this with an example. You have 2 bank accounts, say, one in ICICI Bank and the other in Axis Bank. You use ICICI Bank account as the primary account, where your salary gets credited. Suppose you need to buy a product from Amazon for 5,000. You found that Amazon is providing a 5% additional discount on Amazon Pay ICICI Bank Credit Card.
First check, if you have 5,000 in your ICICI Bank account.
Then decide, if this spend of 5,000 would fall under 50% (essential) or 30% (non-essential) and decide if you still want to make this purchase.
Then, use your credit card for a purchase of 4,750 (net of 5% discount).
After that, immediately transfer 4,750 from your ICICI Bank account to your Axis Bank account.
The amount transferred to Axis Bank will be used for payment of ICICI Credit Card bills.
Usually, people overspend, due to higher limits available on Credit Cards. They lose sense of control. But this overspending hits them at the time of payment of Credit Card bills. This technique of transferring equivalent cash to another bank account will ensure that you will never overspend.
Track Your Expenses
Tracking your expenses is extremely important for sticking to your budget. By tracking, you will always have a fair amount of idea, where your money is going. If you are going overboard, then you can adjust your spending to remain within your budget. Tracking will also help you in accurate planning for the next month. You can use a budgeting app or a spreadsheet to track your spending but I recommend old-fashioned, writing down your expenses in a notebook. You also need to review your budget regularly, so that you can stay on track.
Always Make a List Before Going for Shopping
Failing To Plan Is Planning To Fail. If you do not make a list of things to buy, before going shopping, you will do impulse buying and wreck your budget. First, make a list of things, you need and stick to it during shopping. Don’t buy things, that you don’t need.
Understand the difference between WANT (non-essential) and NEED (essential). If you see something and WANT to buy it, don’t buy it immediately. Wait for a few days before buying. By delaying tactics, you can avoid most of the non-essential expenses.
Plan for Your Food Ahead
If you can plan for your food, you can save substantial money on eating out and non-essential groceries. Some small steps such as buying groceries in bulk, having food at home before going out, and taking your water bottle with you whenever stepping out of home, are such small yet significant steps, that can help you save a substantial sum in the long run.
Cutting Non-Essential Expenses
Identify and cut non-essential expenses. You must regularly review your monthly expenses and decide if you can eliminate any expenses. Sometimes we enroll in magazine subscriptions and Gym memberships, which we do not use. You can cancel those, which you do not need.
Find Cheaper Options
Always try to find cheaper quality options for the product, you are buying. Rather than branded medicines, generic medicine can be used. Instead of costly branded clothing, quality clothes from discount stores may be purchased. Similarly, cheaper alternatives for transportation and entertainment can be explored.
Envelope System of budgeting
In this method of budgeting, we divide the entire available cash into different envelopes as per budget estimates, representing different categories such as grocery, transportation, entertainment, education, etc. As soon as you run out of cash from any envelope in a particular month, you stop spending cash in that category. This method will help you to avoid overspending and keep you within your budget.
Keep Your Morale High
Making a budget is the first step in financial freedom. Sticking to your budget is half the battle won. Stick to 50-30-20 which means not more than 50% of take-home on essential expenses, and not more than 30% on non-essential expenses. Essential + non-essential expenses must be less than 80% of your take-home pay. Try to increase your investment/ saving from the initial 20% target.
To keep yourself motivated, keep on indulging in some luxuries as a reward, while keeping in budget. Keep on reminding yourself that sticking to your budget will reward you with reduced debt and financial freedom over the long term.
Conclusion
Creating a budget and sticking to it, is essential for achieving your financial goals. If you implement the above tips, I am sure that you will not go over budget and have effective control over your finances. Your self-discipline and commitment towards sticking to a budget will lead you to the path of RICHNESS.