We have all heard about budgeting at some point in our lives, whether it is in respect of our personal finances or the finances of a company. So, what does budgeting really mean? According to experts in financial planning and SME banking in Sri Lanka, budgeting means the act of planning how you allocate your funds or finances for various expenses and needs.

Typically, budgeting must take into account your income and expenses over a specific period of time, such as a month or year. It helps you to plan out your expenses within your means, and not go over the income you generate, and get into trouble. It also ensures that you make a plan on how to meet important expenses and not miss out on any statutory payments.

Budgeting can help individuals in various ways, including:

• Controlling finances: By keeping a track of your income and expenses you can get a better understanding about where your spending goes, and help you to avoid overspending beyond your means. For example, someone working overseas should have a budget so that they can track their expenses when they send money to Sri Lanka for their families, so that they have sufficient money remaining for them to meet their own expenses.
• Setting financial goals: You can also set yourself financial goals by creating a budget, so that you can save for other things that you want to do, such as purchasing a home, buying a car, going on vacation, or simply saving for a rainy day. With the excellent savings account interest rates in Sri Lanka and fixed deposit rates in Sri Lanka, you can allocate monthly funds to go into such accounts as savings and investments.
• Managing debts: By systematically allocating funds for debt settlement, you can eventually have the freedom of eliminating your debts.
• Emergency funds: You can allocate funds for emergencies, so that you are not left high and dry when such instances occur.
• Better spending habits: When you track your expenses systematically, it highlights unnecessary spending, which you can eliminate, and create better, more mindful spending habits for yourself.
• Reduces stress: Keeping a control of your finances can help reduce stress and provides overall well-being.
• Efficient resource allocation: If you are running a business, budgeting helps you to allocate your resources more efficiently, which in turn helps you with strategic planning and decision making.

What is included in a budget?

A budget needs to have several components in order to be able to provide you with an accurate picture of your finances. These include:

• Income: This includes all sources of income you receive, such as salary, returns from investments, etc, during a specific time period.
• Fixed expenses: Regular, recurring expenses such as mortgages, utilities, rent, insurance, taxation etc.
• Variable expenses: Expenses that may change from time to time, such as grocery purchases, clothing, entertainment expenses etc.
• Savings: This specifies all monies you want to set aside for the future, such as retirement accounts, savings, emergency funds etc.
• Debt payments: Payments you want to set aside to settle debts, such as credit card bills, loans, mortgage payments etc.

How to create a budget

Creating a budget does not need professional assistance. You can do it yourself by following these simple steps. The idea however is to keep proper documentation and records so that your budgeting is accurate.

Step 1: Calculate your income: Include the income you receive from all different sources.

Step 2: List your expenses: Categorise and list down all expenses, including fixed and variable expenses.

Step 3: Set financial goals: You must set up both short-term and long-term financial goals.

Step 4: Allocate funds: From the income you receive, allocate portions of funds for the various expenses, savings, investments etc.

Step 5: Monitor and adjust: Regularly monitor your budget and make changes where necessary, so that you are always on the right track.

How can budgeting help you to change expensive choices into intelligent savings?

We all know how important savings are, especially in this modern day where there is so much uncertainty. Transforming extravagant spending habits into intelligent savings is a breeze with budgeting, because it promotes awareness and intent regarding your spending habits. Let’s see how this happens:

1. Identify unnecessary expenses: When you list and track all your expenses, it creates awareness on where you are spending unnecessarily. Whether it is frequent meals at fancy restaurants or purchasing unwanted clothing, you can identify these expensive habits and either reduce or remove them altogether, creating more funding to allocate on savings and investments.

1. Setting priorities: With a budget, you can prioritise spending according to your financial goals. Distinguishing between needs and wants becomes much easier, helping you to allocate funds for essential expenses and payments, and reduce spending on non-essential things.

1. Creating a plan: When it comes to budgeting, it is essentially creating a plan in advance on how you should spend your income. Foresight such as this helps you to make strategic choices, and helps avid last-minute ad-hoc decisions.

1. Savings goals: By setting specific targets and savings goals, you are better prepared to face emergencies in the future, and it motivates you to find alternative methods to save money.

1. Encourages mindful pending: You become more conscious about your spending patterns when you track your income and expenses. This helps you to resist making impulsive choices and purchases, and helps you be mindful of whether you are sticking to your set financial goals.

1. Tracking progress: By regularly reviewing your budget, you can see where your spending decisions are making a big impact on your expenses and savings. This helps to reinforce positive financial behaviour.

1. Avoiding debt: By living within your means (within your level of income) you can avoid being in debt. Credit cards and loans come with high costs in terms of interest payable, and sticking to your budget can help you avoid such unnecessary expenses.

Practical steps you can take to change your expensive spending habits:

• Analyse spending habits: Go through your budget and identify high-cost areas that can be adjusted.
• Set limits: Allocate specific amounts towards the different expenses, and stick to it.
• Seek alternatives: Look for cost effective alternatives to spending habits, which can help you save money.
• Automate savings: Make sure that you set-up automatic transfers for savings and investments, to ensure that your savings goals are met.
• Track and adjust: Keep an eye on your budget and adjust it periodically so that you have a more accurate idea of your expenses and spending.

Budgets are truly a fantastic financial tool, that is simple, yet profoundly important for those looking to live within their means of income and save for the future.