What is budgeting?
Here the first thing that comes to our mind is what budgeting means actually. Alright!
so the basic definition is "the process of making a mental model from which you can achieve financial freedom or achieve your financial goals in your life" or simply you can say "it is a management tool that let you start looking at the future in a financial picture".
Here, you put money coming (your income) vs your expenses/where you spend your money. You can do it on monthly basis or yearly or any time frame. It will help you to plan your things easily.
Expenses
Basically, expenses are divided into 3 subcategories:-
1) NEEDS - Needs are the most important key in your budgeting dictionary. You must have to take care of your basic needs. You can't get rid of your basic daily needs like your house rent. electricity bill, mobile recharge, fuel, eating, daily use products, etc. s
2) WANTS - "Wants" are not as much important. It should depend upon your cash flow. Whatever your desires about anything like - new phone, car, national or international trips, own house, etc.
3) INVESTMENTS - Investments that will provide you returns in your future like mutual funds, gold, shares, crypto, etc
Budgeting Model
A basic model of budgeting is 50:30:20. which is mostly told by others. This is a good model in your starting 2-3 years but there is a better approach than this that will help you to plan better returns in your future and provide you a better life.
50% needs should be changed after some time, so you have to shift to a new model slowly. And it will be best if you do it in your early 20s as you will utilize maximum time and time is our best investment. Longer the period better the returns. This model is based on compounding. As you all know in compounding firstly it will rise slowly and after some time it will grow exponentially. And most important key factor here is your TIME.
Even if you invest only for the first 10 years you will get high returns in your late 50s. I designed an excel sheet for you all and you can download it from the given link below and can use it for your budgeting sheet and modify it according to yourself.
FREE BUDGETING EXCEL/Google spreadsheet DOWNLOAD
Basic case study
Let's assume your starting salary is 600000/per annum and your increment is 10 percent per year. You start budgeting from the basic model which is 50:30:20 in your starting year. Now after 1 year you have to reverse the order of spending off your increment from NEEDS: WANTS: INVESTMENT to INVESTMENT:WANTS: NEEDS now you will spend 50 percent of your increment in your investment, not in your needs and your basic salary (600000) allocation is same as before, only your increment allocation is reversed.
After some time you will notice a good change in the allocation of your needs and investments percentage just by a small change. After 10 years Needs: wants investment = 33:30:37, now your investment > needs and wants just by a small change.
This is an excel sheet for your needs you can edit your needs and prepare your personal budget for your needs.
Eventually, you can calculate your returns after every 10 years using this excel sheet with or without inflation. like according to our assumption you will get 22,209 lakhs rupees in your 70s with your investments done in the early 10 years of your 20s with an expected return of 15 percent yearly. And after subtracting inflation (6%) your money value will be 12,06 lakhs.
Isn't that surprising?
Here you got a glimpse of the compounding factor. This amazing outcome also proves that you can live a happy, stress-free life with just the proper budgeting method.
Now you are able to calculate your budget on the basis of different timeframes.
You can calculate on your own by using this free budgeting excel sheet.
