First Make a budget! – this is a good new year resolution to make. Perhaps the best.

Budget, is normally a word which has negative connotations! If you see saving and investing as “consumption foregone today for consuming at a later date” you might see it in a different light. One of the challenges with proper budgeting is that it has to become habitual to be effective. You can survive without knowing how to budget if you manage to keep more money coming in than flowing out!

Once you set your goals, you should quickly see from where the moneys required for meeting you goals an come from. People often resort to budgeting after they have already been dealing with expenses. This article is about making that first budget and sticking to it.

Emergency Fund

The crux of this plan is the quick creation of an emergency fund. In general, traditional budgeting starts with tracking expenses, eliminating debt and, once the budget is balanced, building an emergency fund. Ideally, everyone should have at least one or two months’ expenses sitting in a money market mutual fund account for any unpleasant shocks. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. For someone who lives in a rented home and has only a modest amount of debt, an emergency fund of Rs. 40,000 may work fine. This is on the assumption that your monthly expenses are Rs. 20,000. If you own a house, a car and other things that can unexpectedly require cash infusions, then your emergency fund will need to be bigger. The key is to build the fund at regular intervals, consistently devoting a certain percentage of your monthly pay toward it and, if possible, putting in whatever you can spare on top.

When to use this fund?

You should only use the emergency money for true emergencies: like a medical emergency, a car breakdown, a house repair, etc. Covering regular purchases like clothes and food do not count, even if you used your credit card to buy them. While it’s true that you would save money if you used your emergency fund to eliminate credit card debt, the purpose of the fund is to prevent you from having to use your credit card for paying for the ugly things that life throws at you. With a proper emergency fund, you will not need your credit card to float you when something goes wrong.

Downsize and Substitute

Now that you have a buffer between you and more high-interest debt, it is time to start the process of downsizing. It is odd that the natural solution to “not enough money” seems to be increasing income rather than decreasing spending, but this backwards approach is very familiar to debt counselors.  The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest. This can be a process of substitution as much as elimination. Although eliminating expenses entirely looks like the fastest way to a solid budget, substitution tends to have more lasting effects. People who cut too deep and end up making a budget that they can’t keep because it feels like they are giving up everything.

Focus on Rewards

Another trick that will help your budget come together faster is to focus on the rewards. If you are constantly looking at what you have to cut and give up, the very act of budgeting will become distasteful. A mixture of long and short-term goals will help keep you motivated. This can be as simple as saving for new curtains or something bigger like buying a car with cash. Some of your long-term rewards may just be benchmarks on the way to your overall goals.  Watching these goals become a reality provide motivation to work harder at your budget.

Find New Sources of Income

Why isn’t this the first step? If you simply increase your income without a budget to handle the extra cash properly, the gains tend to slip through the cracks and vanish. Once you have your budget in place and have more money coming in than going out (along with the buffer of an emergency fund), you can start investing to create more income. It is better to have no debt before you begin investing. If you are young, however, the rewards of investing in higher-risk, high-return vehicles like stocks can outweigh most low-interest debt over time.

Conclusion

Much like the disclaimers that come with exercise tapes promising to make you look like a body builder in just six minutes a day, it is possible that it will take you more than six months to get your budget balanced out. This all depends on your situation, including how much or what kind of debt you have. On the upside, just like people who begin exercising for the first time tend to see results sooner than regulars, you may find that your improved budget has immediate benefits for you. Even if it does take you longer than six months to get your budget turned around, it is time well spent.