There is no way to talk about personal finance and investment without discussing the topic of budgeting. Talking about budgeting may sound repetitive, however it is immensely important and one of the most critical factors in the journey of building wealth.
In a previous article, we had written about how to overcome the fear of investing, especially in equities, and we emphasized the method of setting aside a percentage of one's earnings periodically to channel into equity investments. That method already incorporates budgeting, the act of determining, setting aside that percentage, and deploying it accordingly.
So in this article, let us peel the onions further.
What Budgeting Really Means
Budgeting is not anything new. Many of us grew up in households where this was incorporated, and at one time or another have also practised it directly. Creating a budget means learning to choose where your money is going, rather than wondering where it all went.
Budgeting is a financial plan that matches your income against your expenses, savings, and investment goals for a given period. It acts as a roadmap for your money, ensuring you live within your means, control unnecessary spending, and proactively save for the future. It helps you identify your needs versus wants, reduce wasteful spending, and adapt as your financial situation changes over time.
Budgets are bespoke, there is no one-size-fits-all approach. Your budget should be tailored to your income, fit your lifestyle, and align with your savings and investment goals.
The Core Components of a Budget
Income: The first step in budgeting is to figure out your total income. This includes all money coming in, such as salary, freelance earnings, or investment returns. Never overestimate your income or be overly optimistic about it. Keep it real, or even slightly underestimated. It is better to underspend and end up with a surplus.
Expenses: Next is tracking your spending. Your expenses consist of fixed expenses and variable expenses. Fixed expenses are regular, relatively stable costs such as rent, transportation, feeding, school fees, or insurance premiums. Variable expenses are more flexible and include groceries, dining out, entertainment, and other lifestyle choices. Ensure you include every expense, including things like betting if you are into it, or hanging out with friends. Do not leave anything out or to chance.
Never underestimate your expenses. It is often wiser to slightly overestimate and be as honest as possible about your spending habits. However, these expenses must fit within your income. You cannot consistently plan to spend more than you earn, that is a recipe for financial instability. This step can be time-consuming the first time you do it, but it is worthwhile in helping you understand how you currently manage your money.
Savings/Debt Repayment: Beyond expenses, your budget must include savings and debt repayment. These are funds directed towards emergency reserves, retirement planning, family support systems in case of job loss, or clearing existing loans.
Then comes Investments. These are funds directed towards your chosen investment vehicles, such as dividend-paying stocks, money market funds, commercial papers, government bonds, or real estate investment trusts, among others.
At the very least, your budget should incorporate these four buckets. Notice that we did not stop at income and expenses alone, because you must plan to save and invest, no matter how little, from every income you earn. Consider it sacrosanct. Your future self will be grateful.
When Your Budget Does Not Balance
If you find out while budgeting that you are over budget, you will need to take deliberate steps to either increase your income or reduce your spending.
To build wealth, you should consistently reflect on two key questions regarding your budget. How do you increase your income, and how do you reduce unnecessary expenses? These are far more productive questions than worrying about your lifestyle without a clear financial structure.
By all means, avoid using debt to fund your expenses or lifestyle. It is not a sustainable way to live. Debt can be useful in certain cases, such as funding a business, but it should not be used to maintain a lifestyle you cannot afford. Learn to live responsibly within, or even below, your means.
Controlling Expenses and Lifestyle Choices
You can reduce your expenses by cutting down on variable expenses first, and then reviewing fixed expenses where necessary. You do not have to rent that big house if it is taking a toll on your finances, or live in that posh neighbourhood, or pay excessively high school fees, or fly first class. You can always grow into these things as your income increases.
If you experience an increase in income or receive a financial gift, your immediate reaction should be to channel it towards your savings or investments, not to expand your expenses.
Why Budgeting Changes Everything
Budgeting can make you incredibly productive with your earnings, regardless of how much you earn. It removes the abstraction and opaqueness in how your income is allocated, making your financial life more transparent and deliberate.
It keeps you grounded and realistic about what comes in and what goes out, as opposed to being casually optimistic about your finances. If companies implement budgeting to stay on course, then it is only reasonable that individuals do the same.
With a clear budget, you can think more strategically about how to increase your earnings, either through your primary income stream or by identifying additional opportunities. It positions you to meet your expense, savings, and investment requirements with intention rather than guesswork.
A Living Financial Document
Remember that your budget is a living document. It is not meant to remain static, and it should evolve as your life changes.
As your income grows, your responsibilities shift, or your priorities change, your budget should reflect that reality. The discipline is not just in creating a budget, but in revisiting and refining it over time.
Wealth is not something that happens by chance. It is built through the quiet, consistent choices you make with your money, and budgeting is what keeps those choices deliberate. Start simple. Start with what you earn today. Start with any template available to you, even if it is just pen on paper. Then refine it over time.
DISCLAIMER: All contents on this website are for informational purposes only and should not be taken as any form of investment advice. Do your own research and contact your financial advisor before making any investment decision. All contents may not be reproduced, distributed, or used without prior written permission.
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