Introduction

A budget is a financial plan that outlines your expected income and expenses over a given period of time.

A good budget helps individuals track the incoming and outgoing cash, helping them analyse how much they save and how much they spend.

Also read: Why Are GoldBeES A Better Investment Than SGBs

Components of a budget

Majorly, a budget has the following four key components:

1. Total income
2. Fixed expense
3. Variable expense
4. Savings

The total income is the sum of all money received by an individual for a given period of time. This income can come from salary income, income from capital gain and other business income.

Fixed expense is the regular recurring expense one pays irrespective. One such example is Rent Payment. These are expenses that will come periodically and cannot be controlled.

Variable expense is the cost that fluctuates periodically and can be controlled. One such example is grocery expense. They can be increased or decreased based on one’s requirements.

Savings are a component of budget that are parked aside for future goals. They are debited from account but are not a part of expense. An investment in mutual fund can be an example of Savings.

Importance of budgeting

The following are reasons why one needs to have a right budget:

1. Helps avoiding overspending
2. Helps build savings
3. Manages financial stress

A budget tracks every penny of your income statement so one knows where exactly the money is going. Most of the unnecessary spending is avoided.

Preparing a good budget will help build a saving corpus over a long period of time. A proper saving mechanism and management of expenses helps an individual build a saving pool over a long period of time.

Best Budgeting Tips For Single Income Households

The following are the best budgeting tips for single income households:

1. Track your monthly expense
2. Try the 50-30-20 rule
3. Create an emergency fund
4. Create a sinking fund
5. Cut lifestyle expenses
6. Minimise fixed expenses
7. Avoid / Minimise debt
8. Prepare a monthly grocery list
9. Pay yourself first
10. Protect income with insurance

Track your monthly expenses

Tracking your monthly expenses is one of the best financial habit one can develop. Using a monthly expense tracker will give you a clear picture of where your money is exactly going and help you identify expenses you can cut back on. 

You can track your monthly expenses using a pen and a paper or you can develop an Excel sheet to track and monitor the same. 

You can track monthly expenses by grouping them into categories like grocery, entertainment, and food. This allows you to see which category has the most expenses and helps you manage them accordingly.

Try the 50-30-20 rule

The 50-30-20 rule of budgeting is a simple rule which divides income into 3 broad categories. The total 100% of the income is divided into 3 parts which are as 50%, 30% and 20% which are categorised as below:

1. 50% – Needs
2. 30% – Wants
3. 20% – Savings

50% of the income needs to be adjusted under essential expenses which one needs to pay in order to live. These can be monthly rent, grocery, transportation, insurance premium etc.

30% of the income needs to be adjusted under non-essential expenses that improves the quality of life. These can be OTT subscriptions, dining, entertainment etc.

20% of the income needs to be saved / invested for financial security and growth.

Creating this simple category helps an individual plan 100% of its income and manage the expenses in a simple yet strategic manner effectively and efficiently.

Create an emergency fund

An emergency fund is a liquid fund one needs to park to meet emergency expenses. An emergency fund creates financial stability and does no disrupt the planned monthly budget.

Without an emergency fund, one deviates to move towards credit cards and personal loans, which could in turn lead to monthly budget disruption.

An emergency fund must at least be 3 times the monthly income of an individual. One needs to save little by little to build an emergency fund before investing.

Create a sinking fund

Sinking funds fall under a type of expense that cannot be predicted at the time of planing the monthly budget.

A sinking fund reduces one’s dependency on credit card, so one can enjoy guilt free spending and prepare for unplanned expenses.

A sinking fund must be at least 3 times the monthly income of an individual.

Cut lifestyle expenses

To succeed in the early stages of a career with low income, one must be financially disciplined and avoid unnecessary lifestyle expenses. 

One needs to focus more on managing good savings rather than having additional spendings.

You need to redirect the money saved from lifestyle expenses towards building an emergency fund. 

Cutting lifestyle expenses early can also prevent lifestyle inflation. Lifestyle inflation is basically when you increase your lifestyle expenses based on your increase in income levels.

Therefore, keeping lifestyle expenses in check will create a larger gap between increasing income and expenses, which in turn will lead to broader savings.

Minimise fixed expenses

Fixed expenses lock up a portion of your income every month.

Fixed income needs to be planned at the inception of setting a budget, as these expenses will be recurring irrespective of the month.

Lower the fixed cost, the more will be the capacity for monthly savings. For example, if the fixed expense is high on rent, one needs to have a preparedness of moving into a less rental apartment to cut down on the fixed expenses over a period of time.

Avoid unnecessary long term debts and EMI’s which could lead to increasing the fixed expenses. If you are using the 50-30-20 rule for budgeting, ensure that the fixed expenses are falling under the 50% bracket only and does not exceed the same.

Avoid / Minimise Debt

Long term debts will never create a pathway for individuals to move towards financial freedom. The foundation of a strong financial stability is having zero debt.

It is noteworthy to mention that, interest on debt is an added expense, which can be avoided by strategically planing the budget.

Interest on debt could create punctures in budgeted plans which could lead to financial distress and long term debt traps.

Prepare a monthly grocery list

Preparing a monthly grocery list helps an individual reduce wastage and stay organised. Hence, a proper grocery list under the planned budget helps reduce impulsive shopping which could reduce the monthly expense.

Having a grocery list could also help you convert your grocery to be a part of your fixed expense, which once fixed within budget can be planned and repeated month on month basis.

Having an organised grocery list also helps in heathy eating by motivating you to eat home cooked food, rather than resorting to fast food.

Pay yourself first

Paying yourself first simply means, first save and then spend. This is the foundation of personal finance. You need to save your income’s 20% first, then plan the rest for expenses. 

This helps in being consistent in saving which could in turn lead to long term wealth with the effect of compounding.

Saving money first helps individuals shift their mindset from “saving what’s left” to “spending after saving first,” which is important for financial discipline. 

Protect income with insurance

Last but not the least, one needs to have the right insurance policies to protect themselves from unexpected financial shocks.

For instance, an added medical expenses could contribute to a truckload of financial distress which could further erase major chunk of your savings. You can transfer this risk by protecting your family with a health insurance. 

Having a health insurance could also provide you an access to better health care facilities without worrying about costs in case of emergencies and uncertainties.

Conclusion

Mastering the tiny, dependable routines that safeguard and increase your income is much vital for establishing a solid financial foundation than making big, drastic changes.

Thus, you gain more control, confidence, clarity and command over your finances in each stage. From making a budget, keeping track of your spending, avoiding needless debt to building up sinking funds, emergency reserves, and paying yourself first.

Achieving financial stability requires deliberate planning and focused activity. It doesn’t just happen overnight. Begin modestly, maintain consistency, and let your finances do the talking.

You might also like: What Are Best Low Risk Investment Options For Senior Citizens