If you do not know how much your expenses are, chances are you are in a deep financial distress. Most of these people don’t even know how much money they have in their bank accounts.
If you have ever given any thought about creating a budget, this is a comprehensive guide which will help you where you stand when it comes to your finances.
The number one point you must do is create your balance sheet. Don’t worry! You don’t need to approach a Chartered Accountant (C.A.) for that, you can do it on your own.
The basic accounting equation says that,
Assets = Equity + Liabilities
Here, assets are all the things which you own, while liabilities are all the things which you owe.
Equity is in other words is your net worth. This is what you need to calculate from your balance sheet.
First, you need to calculate your assets. (Take a print out of this for ease or you could do this in a spreadsheet)
Similarly calculate all of your liabilities.
That is all you need to know to calculate your net worth.
Take the total assets and subtract the total liabilities. This will give you your personal net worth. Now there are some questions you need to ask yourself.
- Is your net worth a positive number?
- Do this exercise for the next 4-6 months. Check the trend of your net worth. Is that increasing?
If you answered yes to both these questions, you have a strong balance sheet and are in a good enough financial state. If your answer is no to any of the questions, you need to dig deep.
Now that you have your balance sheet, you need to start budgeting.
A pocket diary is all you need to make your budget.
What you need to do for the next 30 days is track each and every rupee that comes in and goes out of your pocket. Classify all the income and expenses as given below.
Once you are done with calculating your income and expenses, subtract your expenses from your income.
If the number is positive and a good enough number, you are doing well in your financial life, and your net worth would also be increasing.
But, if this number is negative or close to zero, you are in one step away from blowing away your financial life.
One big event, like a job loss, medical emergency etc., will put you in deep trouble.
You must start doing something about it if you want to have financial peace in your life.
Identify all the things which don’t have a positive impact on your life. Try to cut these things down. After adjusting this, write down what your expense table should look like. Your expenses should be capped at a maximum of 80% of your total income. At least 20% should go to the future in the form of investments. (link)
Start putting away some amount for your emergencies. This amount should be at least 3-6 months of your expenses.
Track all of your debt and start using the Dave Ramsey strategy to become debt-free.
List down all your debts (including credit cards) apart from home loans, in increasing order with the debt with the smallest denomination at the top. Start by paying off the smaller ones first.
A rule of thumb on buying items (except houses): If you can’t be debt-free on it within 18-20 months, then don’t buy.
You can find more about Dave Ramsey’s strategy in his book, The Total Money Makeover.
Always keep in mind that having good finances means having one less problem in your life. Start managing your finances, your life will be better.
There is an alternative way to keep a track of your expenses, you can click on the image below to know more about it.
Hope this helps in budgeting!
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