Have you been ever involved in your home budgeting or your personal budgeting during your overall financial planning process ? If you belong to the strata of investors who do not know where your income is going, then you are not the single one out there. Most of the investors I have interacted with do not track their income and spends, so they never know how much they are splurging and on what. They end up with tattered finances and no savings for their future. The solution to all these woes is a simple concept called personal budgeting or home budgeting.
Loosely defined, personal budgeting is all about allocating your incoming earnings across different heads of expenses to make sure you are able to spend within your means and end up saving (and I must hastily add) investing, a decent percentage of your income for your future.
Personal budgeting or home budgeting is about forecasting your spend and then tracking it against the spends that you actually do so that you are aware of how your money is flowing in and out.
Home budgeting made simple
Here is how you can create your home budget.
Step 1: Know where all your income is coming from.
To begin with, list all your sources of income. There would be one main source of income for everyone like salary from employer or earnings from business. The rest could be earnings from dividends, interest from investments, rental income, bonus etc etc.
You could get all these details of incomes received from your bank accounts. For those who deal much in cash and their income is not consistent, you will need to document this for a few months and then average it out to arrive at a figure to make sure you have the right income figure for yourself. This is the first baby step in personal budgeting.
Step 2 : Know where you are spending all your money.
Expenses can be divided into discretionary and non discretionary expenses. Non discretionary expenses are those that you must spend 
each month and cannot do without. These include groceries, rentals, insurance premiums, bills, clothing, education, transportation among many others. Discretionary expenses include entertainment, dining out, gifts, vacations, hobbies and other recreational spends that can be curtailed and reduced.
It’s important to segregate these two as you can figure out the minimum capital you need each month to survive (non-discretionary expense) and the amount you can attempt to reduce by cutting down on your standard of living (discretionary expense). During this step of home budgeting, you should decide for yourself which spends you want to put in each category.
How will the above personal budgeting steps help me ?
After you have documented this data for (say) a month, look at the overall picture of what your cash flow looks like. Look at how much percentage of your income you are spending across discretionary and non-discretionary heads. Tweak and adjust practically to make sure you can stick to the home budgeting you have done.
After you have made a home budget, analyze it to see what it reveals. For example, it could be telling you that you are investing 25% of your income and all your loans are summing up to less than 40% of your income. That leaves 35% for you to spend across discretionary and non-discretionary heads. Is this acceptable and practical for you ?
Track against actual spend
After you have established what your home budgeting looks like, track the actuals to see how much your variance was from what you had wanted to spend. Tracking against actuals reveals how practically you planned for your personal budgeting and whether you can stick to it.
If you find that you are way off your forecast, then tweak the next month’s home budgeting to the one that you could follow. For example, you might unravel the fact that you are spending too much on eating out and so you will curtail that to come in line with your total ability to spend.
What can personal budgeting achieve ?
Here are the advantages of doing home budgeting.
- It helps you manage your money effectively.
- It forces you to adjust your lifestyle to make sure the income and expense match in a better way.
- Helps you keep track on your spending patterns to get a firm understanding on where you are spending the money.
- It forces you to know whether you are saving and investing for your future goals in life.
- It makes you more confident and a better financial person.
Tools to use for home budgeting
One could use any of the below excel sheet for personal budgeting. These are free and downloaded from the internet. However, you need to fill in all the data yourself month on month to analyze.
Sheet 1 : Budget Planner
Sheet 2 : Home Budget Worksheet
(Due credit given to the original source. Please click the links above and in the new page that opens, download either by clicking the link you see or by right clicking your mouse and clicking on “Save As”).
To make things simpler, there are many online versions of money management tools available freely to help you do your home budget.
Thanks very much for this. I found the first one very detailed and useful.
Yes, the first one is the one I used initially before I switched to online version. Are you starting to use this now ?
Hey thanks. My husband and I were just starting on this and this is at the right time. Is there a full list of what we need to pu under the headings of dis. and non-dis expenses as you have said above ?
Shilpi, the full list is within the sheets themselves. You can also move around the categories based on what you want to be discretionary and non-dis. Like for example, I usually put all investments as non-dis – I cannot live without not investing in the very same was as I cannot without eating !
I do use online softwares for this and I find them very useful. Not sure how painful otr time consuing these sheets will be. But anyway a great job
The excel sheets can be time consuming but its better than not using it at all. Yes, I like the online money tools better as well. I use Perfios. Which one do you use ?
The Budget Planner is really Cool. Till Now i just create my own excell sheel via google docs. But the budget planner is much much better. Which online version you are using, can you please provide the link.
Rajiv, I use http://www.perfios.com
There are many like Perfios available, I intend to cover them in a future article.
perfios needs to enter all the PIN numbers and Passwords. But that seems to be NOT safe. I think its better to depend on portfolio management sites which manually enter all the investment details. We have moneycontrol.com, valuresearchonline.com.
http://www.moneycontrol.com/
http://new.valueresearchonline.com/
These sites do give us ratings, ranks about Mutual Funds too.
Source:
http://mytipstowardswealthy.blogspot.com/2010/09/reviews.html
@Rajiv, Perfios is safe. It does not store any data on its servers = everything is stored at clients side. The ones you metion are good as well, however, they don’t pull data automatically from your DEMAT and bank accounts (as far as I know) and the manual process is time consuming. It depends on each one’s comfort level. Do you use ValueResearch or Monecontrol ?
Thanks so much for th einformative articles. I use pen and paer to do this. Now I will begin using these sheets. Thanks again.
@Dravid, Pen and paper !! You need to switch over to these now. Let me know how it goes.
Thanks for this informative article.
I was not able to download the excel sheets mentioned in the article.
Can you please have a look at it.
@Rajesh, I checked and I was able to do it in all browsers (IE,Chrome and Firefox), please try again and if not, I shall send it by email to you.
The budget excel sheet seems good. Will start using it soon. 🙂
Yeah, luckily more and more online money management tools emerge daily and you can pick one that would be most suitable for your unique financial needs. I’m personally using https://www.inexfinance.com/ because it’s secure, jam-packed with simple and more advanced features, and free.