Monthly Budget Planning for Beginners With Proven Tips

I will not shy away from saying that I love to plan. From meals to planning a trip, I love it all and find great joy in everything I plan. Having said that, I believe budget is the single most important thing that anyone should be planning.

Planning your monthly budget is not something new to most. It’s a very common thing in the world of finances, but planning your month may be a little difficult for you as it involves managing all the small details in your life. You will have to think about everything from water and electricity bills to grocery shopping etc. Luckily I have got you covered with monthly budget planning tips that can help you out. So, without further ado, let’s dive right into monthly budget planning process!

Put simply, making budget for a month is knowing how much you are earning and planning how you are going to spend it. In this article, I will cover the basics of budgeting, as well as tell you how I personally use my own budgeting system. I will discuss tools you can use for planning your budget and finally conclude with a sample budget.

Income

First of all, you need to calculate your all net take away income. You may have multiple sources of income like:

• Salary
  As you may already know, your CTC (cost to company) does not reflect how much is actually credited in your bank at the end of the month. So when planing your budget, take into consideration different deductions from salary. Your can use the following formula:
  In hand salary = Gross Salary – Income Tax – Employee’s PF – Professional Tax
• Rent from leased property
  If you already own a property that you rent out, kudos! Add that to your income as well, just don’t forget that income tax is applicable on total income which means you will have to pay tax on rental income as well.
• Income from side hustle
  Side hustle can become substantial part of your total income but I would suggest taking into account only amount that you are ensured you will make from this every month when making budget. Also subtract all the expense you may have incurred, including GST and income tax.
• Others – dividend, interest

I would highly recommend taking into account only amount you are ensured of getting every month.

Emergency Fund

Before we allocate budget to different categories, I want to talk a little about creating an emergency fund. Why do you need one? There may be a medical emergency, you may need to take care of a loved one, you might loose your job, your laptop or phone gets damaged beyond repair and you might need buy new one etc. The fact is nobody wants to be in such a situation and I hope you never end up in one but you still need to be prepared for it.

The amount one should keep in emergency fund varies for everyone. For me, I keep six times of my average monthly expenditure in liquid assets as emergency fund. What are liquid assets? Assets you can quickly convert to cash if needed, listed below

• Cash in hand
• Cash in bank
• Stocks
• Fixed deposit with no penalty for premature withdrawal
• Mutual fund with zero exit load

You may also reason that credit cards are there to serve exactly that purpose but let me explain why relying on credit card in this scenario may not be the best idea. Don’t get me wrong, I am not against the idea of credit card. I simply don’t think depending solely on them for emergency might only lead to more stress. Let’s not forget that credit card is nothing but a small debt that you take from bank for a short duration and going into debt is the last thing you want to do in difficult times.

Budget Allocation – 50/30/20 Rule

Now that you know how much you make every month and hopefully I have convinced you to create an emergency fund, it’s time to allocate income to different categories.

The 50-30-20 rule is a great budgeting technique. It is a simple framework that helps you determine the percentage of your income to spend on different categories. As per this framework,
– 50% of your monthly income should be allocated to needs such as food and shelter.
– 30% of your monthly income should be allocated to wants such as clothes, entertainment, and dining out.
– The remaining 20% of your monthly income should be saved.

Now let us try to understand each of these categories – needs, wants and savings in detail.

Needs

As the name says, money that you absolutely need to spend comes in this category. Anything that you spend on food, shelter or on service that help you in continuing your job (like childcare) should be considered in this category.

Let us understand different things that you should spend your needs budget on.

• Housing
  Ideally, your expenditure on housing (rent or EMI) should not exceed 30% of your total income in any case.
• Utilities
  All the expenditure on electricity, WiFi, phone, water.
• Transportation
  This is the amount you spend on travelling to and from job. Be it taxi or gas and maintenance of your car.
• Grocery
• Medical Expenses
• Insurance
• Childcare
• Housekeeper/ cleaner
• Loan repayment
  The minimum amount you need to pay (EMI) will be classified under need but anything above this amount that you may pay will go in savings category.

Wants

This category is where your movie and dinner night expenses go. It is for money spent for fun. Sometimes it can get a little confusing to distinguish between need and want. For example if you buy an expensive dress, should it be considered need or want? If it is for an important upcoming event, it may be considered a need but if it is an impulsive buy, it will definitely fall in want.

Needless to say, this is the category where you will struggle the most to stay within budget. Most of the expenditure in this category is done on weekend. So a great way of staying within limit is by dividing the allocated monthly budget by number of weekends (usually four). This is usually how I do it and it has been working well for me.

Wants may include the following:

• Eating out
• Entertainment
  This includes monthly subscription to streaming services, movie and show tickets,
• Vacation
  If you are planning a long vacation, starting to save for it in advance is a great idea. Cut down on the other expenses and then go for vacation worry free.
• Hobby

Savings

I would insist putting aside 20% of your income as soon as your salary is credited. The reason for this is simple. You don’t spend money you don’t have. Where do you put it? We will discuss it in the next section.

• Emergency fund
  Creating emergency fund is nothing but keeping your six times your monthly expenses in liquid assets.
• Retirement fund
  You have to make your money work for you or you will have to work your whole life and this is the reason you need retirement fund.
• Loan repayment above EMI
  Your EMI is accounted for in needs category but any advance payment go in savings category.

Investment

Now that you have savings, it’s time to start investing. When you start budget planning, you should first create your emergency fund which I talked about in earlier section. Once that is done, you can start investing in other options. Some of them are as below:

• Fixed Deposit
• Recurring Deposit
• Stocks
• Mutual Fund
• SIP – Systematic Investment Planning
• Commodities
• PPF – Public Provident Fund
• NPS – National Pension Scheme
• ULIP – Unit Linked Insurance Plan
• Post Office Monthly Income Scheme
• ELSS – Equity Linked Saving Scheme
• Senior Citizens Saving Scheme
• Real Estate

Recording Expenses

I personally believe recording your expenses is very important. Is it an essential step? Maybe not but it does help you tracking exactly where your money is going. There have been multiple occasions where I was able to spot an unusual increase in a particular category and corrected myself accordingly.

Expense Manager is a great Android app I have used before to record my expenses. Also, good old Microsoft Excel and Google Sheets are also great.

Budget Adjustments

It is almost impossible to stick to the planned budget to the T every single month. Following are some of the things you should do in those cases:

• If you are finding it difficult to stick to budget allocated for each category regularly, I would suggest keeping them in different accounts. You can also put the pre-decided amount in a digital wallet and make all purchases for one category from it.
• If there is major expense that you know you will incur in coming months, like upgrading your laptop, start saving up for it in advance.
• Roll over balance left in any category to next month. Similarly, cut down your expenses if you spent more money than allocated.
• If you are not spending all the money allocated to needs or wants month over month, readjust and spend that money! Yes, you read that right. You have already done your calculations and taken care of your savings, now you need to enjoy that hard earned money.

Sample Budget

Let’s assume that total in hand salary of you and your partner is Rs. 1,00,000 per month.

Take Away

It’s important to remember that your spending habits change over time. Even if your basic needs stay the same from month to month, your wants and savings may change along with them. For example, if you get an unexpected raise or win the lottery, your budget will look very different from what it did just a few months ago!