Imagine what would happen if one fine day, you lose your job or you need money for an emergency surgery for a loved one. It is in such circumstances that budgeting comes in handy.

A budget makes you aware of your financial situation and helps you create a contingency fund to tap into when in need.

Fixed vs. Flexible expenses

If you are someone used to hard cash and don't like the idea of a credit or debit card, then you just need to calculate your week's regular expenses and multiply that into four to get your monthly outflow.

If you are someone who likes detail (that would be even better) then allocate expenses under different categories such as food, transport to work, shopping and entertainment and you can further divide the categories into groceries and eating out.

The detailed break-up will help you pin-point exactly where you are overspending and take a conscious step to curb those expenses.

You should divide these expenses under two broad categories namely fixed expenses and flexible expenses.

For example, under the fixed expenses your loans, utilities and services availed will be clubbed and flexible expenses could include dining out, entertainment and shopping for clothes.

Spending Forecast Plan

Chalk out a ‘Spending forecast' plan. Evaluate what things you need to buy in all the five main areas — household, transport, food, entertainment and other needs — and set aside monies for that.

Other needs may include emotional expenses like that snazzy electric guitar you always wanted to buy to cultivate an entertaining hobby a wardrobe upgrade or a professional course you were planning.

Contingency Funds

Evaluate a scenario where you may be out of a job, then you need to figure out how much you spend each month and then set aside that money multiplied by 6 as something to fall back on, when fate hands you a raw deal such as a lay-off. This way you ensure that you can be self-reliant and can be prepared for unforeseen emergencies. Set aside some money apart from a medical insurance for any sudden, short term medical expenses you are likely to incur. Keep this cash accessible and yet be disciplined enough not to dip into it. Once you have identified the fund boxes — spending forecast, contingency fund for job loss and medical expenses, be dedicated and generate your money flow into these funds consistently. This could be once a quarter but it would be more manageable if it's once a month. Before this final step of dividing the savings, you need to save every month! If you are like most of us, who notice the funds have run dry just a few days before the pay cheque is due to arrive, relax! There is a way around it.

Create another account which, perhaps, gives you a good interest rate on your savings. Enable an auto transfer of a percentage of your funds based on your calculations on a suitable date of every month to this alternate account. Keep this parked cash out of your reach and from here invest it in suitable financial instruments which can be liquidated when the need arises or simply keep it here and let it accumulate interest.

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