Budgeting is a habit and a skill that puts you in the driver’s seat to financial wellness. These benefits of budgeting offer a snapshot of how life will look once you inculcate it as a core habit in your daily life.
How you manage your money reflects on your quality of life. It enables you to be prepared for unpredictable events, such as job loss and choppy markets. It also enables you to upgrade your quality of life, and reduce the stress that comes from monetary scarcity.
There are many approaches to achieving financial well-being. But one of the core pillars is to practise budgeting in your daily life. In this blog, I would like to delve deeper into the meaning of budgeting and deconstruct some of the unexpected advantages of budgeting.
What is Budgeting?
Budgeting is the process of allocating funds for specific fixed, variable, and miscellaneous expenses that you incur every month.
- Fixed expenses can comprise rent, utilities, mobile and Internet bills, and groceries.
- Variable expenses can comprise eating out, clothing, and festival expenditure.
- Miscellaneous expenses can include emergency repairs and other sudden costs.
Successful budgeting depends on being able to update your expenses. Analyse when to increase or decrease your budgets for various heads, based on your real-time needs. You can budget using a physical notebook, a spreadsheet, or an app that automates all your expenses.
The latter also enables you to track your expense data over a period of time and learn from your expense patterns. Over time you will start to excel in this practice, and the benefits of budgeting will start to manifest in your quality of life, and bank balance.
3 Advantages of Budgeting
Discover how the practice of budgeting, contrary to many popular myths, enables you to lead a stress-free, fulfilling life, and achieve all your savings goals.
1. Lead a High-Quality Life
There are several myths surrounding the habit of budgeting. Many consumers believe that they will need to give up various indulgences and lead an extremely frugal life. Contrary to such beliefs, the process of budgeting helps with your expenses.
It helps you expedite the rate at which you can achieve your short-term savings goals and long-term savings goals.
An example of short-term savings goals is taking vacations to your favorite destinations. With budgeting, you can do it without being broke when you return. Also, you will not have to skim high-quality experiences during the trip.
An example of long-term savings goals is retirement. Not only will you be able to live a comfortable retired life, but you can also consider early retirement. You can quit your full-time job and do what you enjoy, not for the money, but the passion. Another great example is launching a business with your own funds.
2. Live a Debt-Free Life
Living a debt-free life is a blissful life. On the other hand, being in debt is accompanied by worries, guilt, and reduced quality of life. Budgeting empowers you to prioritise and pay off your debt faster. I recommend allocating a significant portion of your budget to paying off debt, making it a strategic, structured process.
For good saving goals, I highly recommend building an emergency fund. This is a secret weapon that bails you out in any emergency, from out-of-pocket medical expenses to job loss. An emergency fund comprises six to 12 months of monthly expenses.
If you are paying off a mortgage, be sure to include it as well. Without any emergency funds, you will be forced to take a loan, which will take you further out of pocket. If you have not already built an emergency fund, I recommend making it one of your top saving goals for 2022.
3. Grow Your Passive Income
One of the top benefits of budgeting is that it allows you to allocate more funds towards investment. This is a process by which the money you earn can be invested. The money is invested into tools that leverage the power of compounding to grow your money.
The best part of such an investment is that you do not play an active role in it. It continues to grow as you sleep, take vacations and focus on the business of living. The money earned through this activity is known as passive income.
So, how much should go into savings per month? Many financial gurus recommend saving goals by age model, i.e, you save your age. When in your 20s, you save 20% of your income. In your 30s, you save 30% of your income. In your 40s you save 40% of your income, and so on.
From my perspective, I recommend not being restricted by such rules. Save as much as you can to put away as investments, irrespective of your age. Today, you have access to a wide range of investment instruments that balance risk with rewards.
Your portfolio can comprise a mix of stocks, mutual funds, digital gold, bonds, and fixed-income instruments, based on your risk appetite.
The practice of budgeting may feel like an overwhelming activity initially. This is natural when trying to build a new habit. Some days and months you may forget or feel too lazy to look at your budget.
But, as with everything, practice makes one perfect. As you continue to budget, you will get better at it and will be well rewarded. It will make taking key financial and life decisions easier.
In my experience, those who excel at budgeting can accelerate their wealth-creation journey. They have money left over to invest, which in turn generates more passive income. Putting aside money for investing should be another top saving goal for 2022.
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