Everyone Needs A Budget. Here’s Why?
Budgeting will give you more freedom than restricting you. Yes, you read that correctly.
By budgeting your needs properly, you are free to spend your money on pleasures / experiences, without worrying about anything else — that is true freedom! This alone should be the reason for you to start budgeting.
A Tale of Two Friends
Abu and Babu are good friends. Both are having well paid jobs. Abu invests 5-10 minutes daily to note down all of his expenses that he made during the day. He then spares some time at the end of every month to see where his money went. He thinks that just having a high income is not enough. It becomes very important how you spend it. He also has a term insurance, has topped up the health insurance that his employer has provided, and also has a couple of years’ worth of expenses saved in emergency funds.
You might be thinking that Abu doesn’t have any “fun”. Well, he does. But, he doesn’t buy things that he doesn’t really need. Instead, he spends more on experiences — collecting more memory dividends. He has a set budget for that as well. This means that not only he enjoys the present moment, he is also planning for the future.
Babu thinks otherwise. As he has more than sufficient income, Babu thinks that it pointless to try and budget. So, he spends most of his salary buying fancy stuff. He doesn’t have any term insurance, no savings — he just spends almost everything that he earns.
During the pandemic, their employer is facing cash crunch, and they have to terminate some of their employees. Abu and Babu are two of them. Babu is terrified. He has to immediately find a new job, as he has almost no savings. He hadn’t really expected something like this. As the situation is tough, companies are not hiring in numbers. It has become difficult for Babu to get a new job. He is forced to cut down on his lifestyle. He starts panicing.
Meanwhile, on the other hand, Abu is calm as he has an emergency fund which was created for the “unexpected” situations that life could throw at him. That meant that even if he didn’t get any job, he would be able to survive for at least two years.
Lessons To Learn
This story gives us four major lessons to learn from. Let’s look at each one them.
1. Emergency Fund Is A Must
No matter how much you think your job is secure (even if it is a government job), you must have an emergency fund. This should be worth at least six months of your expenses. Click To Tweet This will not only help you in case of job loss, but also in case of unexpected expenses like medical emergencies. Whenever you use this fund, you will replenish this immediately.
2. Term Insurance For Dependents
If you have a family that depends on you, term insurance is a must — NO EXCEPTIONS! This term insurance should be covering at least a decade’s worth of expenses for your family. It would be ideal to have a higher cover that covers 15-20 years’ worth of expenses, along with some goals like your children’s education, children’s marriage etc.
3. Save Some For Future
You have to include this in your budget. Because if you don’t, you’ll have to keep working till you die. You don’t want that, do you? It doesn’t matter how small that amount is, just save and put those into appreciating assets.
4. Know How Much You Spend
When you start measuring anything, you start managing it. Same goes with money. Once you start tracking each and every transaction, you will soon be able to know where the leak is.
Finally, when you budget, do keep some part for “fun”. Celebrate milestones. Because, what’s the point of having a cake if you can’t eat it.
P.S.: In case you need a tool to track your budget, but don’t want to share your data with third-parties, look no further than my budget guide, which also includes a portfolio tracker. You can learn more about it by clicking on the image below.