Can budgeting help you create wealth?

Budgeting allows you to take control of your personal finances. A budget can be termed as a written plan often called a cash flow statement, which shows how you should spend your money. Simply put, a budget is a summary of your income and expense for a given period. It helps you decide whether you can grab a pizza bite or should head home for a dal-rice.

Budget can be created using a Excel spreadsheet which provides a concrete, organized and easy to understand breakdown of how much money is coming in and how much is going out in the form of expenses. You can create a monthly or an annual budget. However, creating a monthly budget would help you to manage your finances with high accuracy. Budget helps you in making financial decisions ahead of time, which in turn makes it possible to cover all your expenses throughout the year. Carrying out budgeting activity consistently can help you begin to build wealth.

Consistent planning and monitoring of your budget often help you identify unneeded expenditures and quickly adapt changes in your financial situation. This helps you in achieving your financial goals as well. When you actually take a look at your expense breakdown, you may get surprised by the expenses that you made and think why you would have made such an expense? This is an essential step to fully understand your spending habits. When you create a budget, it decreases your stress levels as with a budget there are no surprises or even if there are then you are already prepared for the same.

Let’s take an example to understand it better. Say you have a monthly income of Rs. 50,000 and monthly expenses of Rs. 30,000 of which fixed expenses comprises Rs. 20,000 and remaining Rs. 10,000 are discretionary expenses. This leaves an investible surplus of Rs. 20,000. Discretionary expenses are those expenses which are made at your own discretion. Simply put, these are those expenses which can be avoided and you have control over it. You have a need to create a corpus for your child’s education which is 5 years from now and for which you require Rs. 20 lakh inflation-adjusted. Assuming 12 per cent rate of return on investment, you invest Rs. 20,000, which is your current investible surplus, you would be able to accumulate Rs. 16.5 lakhs as against Rs. 20 lakhs requirement. Now let us reduce your discretionary expenses by 50 per cent to Rs. 5,000. This will increase your investible surplus to Rs. 25,000 and now all other things being constant, you would be able to accumulate Rs. 20.62 lakhs which is your requirement.

So, budgeting is a very powerful tool and to be done regularly. Due to boredom often people shrug it off. But you need to understand that it will indeed help you take control of unnecessary expenses and also you would be able to control the use of credit card which is also known as one of the tools for financial destruction. However, if it is used diligently and in a disciplined way, then it can help you serve temporary liquidity issues.