Usually, the word “budgeting” has a negative connotation. It is associated with a constraint-driven, no-fun approach to finance. Budgeting and sticking to a budget prevent you from going for that cool overseas vacation or from buying the latest smart phone whenever you feel like it. So who needs budgeting and what is the need for yet another article on this topic?
Look at it this way. Excelling in anything requires discipline. Talent can only get you so far in life and the world is full of talented but unsuccessful people. There are several examples of people from various walks of life, who succeeded in spite of their modest talent, because of their hard work and discipline. For example, Ivan Lendl was considered not as talented as John McEnroe. That didn’t stop him from having a head-to-head score of 21-15 against McEnroe. When questioned about his lack of talent, Lendl had famously retorted with “How do you define talent?” and replied that his talent was working hard.
When it comes to money, think of your income as talent and your financial prudence through budgeting and investing as “financial discipline”. With the right “financial discipline,” you can be money wise, despite a modest income.
But what comprises good budgeting skills? One of the benefits of being young is that you can start running the financial marathon early enough to be financially independent in your 50s or even late 40s . To do that, start investing intelligently steadily over a long period of time. A disciplined investing approach over, say, 20 to 30 years can do wonders for your financial well being. Budgeting is a useful tool that helps you in your investment marathon.
Budget smartly
If you are starting from zero, put aside a regular portion of your income (at least 25 per cent) as a “rainy day fund” that is equivalent to at least six months of your income. It can be parked in a savings or fixed deposit account. This is to ensure that, even in case of emergencies, your investment account is not touched.
Why is this important? Investments are risky. In other words, their value fluctuates. If you do not have a “rainy day fund”, you may end up liquidating your investments at the worst possible time.
Once you have your “rainy day fund” ready, start moving money to your investment account and continue to build it lifelong. Since you are reasonably protected against financial emergencies, your investments will slowly but steadily compound their way in to a very valuable nest egg, over a period of time.
Adjust all your other financial commitments to the other 75 per cent of your income. While it will be difficult initially, over time you will get used to this and will learn to live within your income and the joy from your growing investment account will offset your budget blues.
Venkatesh is the co-founder and Director of Money-Wizards, a company engaged in financial literacy and money education for adults and college students. Details on workshops at: Info@Money-Wizards.com
