Do budgets scare you?

A good budget should not only helps us to plan our finances but also analyze how and where we spend our money. In this article, I am sharing a technique to better manage our budget. The term budget scares most of the people. Thus, I would prefer it calling a spend-list. Does it scare you too? Then, this article might help you.

The technique, called as Voluntary-Mandatory-Fixed-Variable Matrix or VMFV matrix, has four different quadrants namely Fixed Mandatory, Fixed Voluntary, Variable Mandatory and Variable Voluntary. These are the quadrants where we fit our spend-list.

Fixed Mandatory quadrant contains spend-list for stuffs those have fixed cost as well as those are mandatory. They include spend-list for Mobile Recharge, House rent, Commuting for work, etc.

Fixed Voluntary quadrant contains spend-list for stuffs which have fixed cost and are not mandatory or voluntary. They include subscriptions, Internet bills etc. This spend-list is allocated for stuffs which are more of personal choice.

Variable Mandatory- This quadrant has spend-list allocated to our purchases which are mandatory and vary in cost. This includes Electricity Bill, buying house hold equipment etc.

Variable Voluntary- This quadrant has spend-list allocated to our purchases which vary in cost and are voluntary. They include entertainment, subscription of entertainments like netflix, purchasing books, dining in a restaurant, travel, etc. Again, they also depend on personal interest and are variable in cost.

An effective plan should include allocation of funds based on 50/30/20 budget rule, which states that 50% of income should go to needs, 20% to savings and 30% to wants.

Thus, the spend-list which are mandatory should be allocated with 50% of income. The voluntary spend-list can be up to 30% of our income and rest 20% goes to saving. Any excess funds, if remains after mandatory purchases, can be applied with same rule to spend on savings and wants.

A simple excel sheet, filled with spend-list for various purchases, in the above mentioned matrix fashion would help us to analyze the budget better. In most cases, by just tracking our spending over a period of month or more, we tend to avoid most of unwanted spending of money. It's simply because we forget trivial things. It could be a chocolate for a penny or few dollars for short ride. But, the amount is lump as it gets compounded. For example, a smoker roughly spends 10$ for a pack of cigarettes which roughly accounts for 50$ a month and is compounded to whopping 600$ a year. There's huge list of things that can be bought with 600$ isn't it? If it's a voluntary spending, we shouldn't see its cost at the time of spending, instead we should anticipate its compounded effect over a period of time and that's exactly where our visual charts help us . There are various apps too to record our spending and provide a big picture with analysis and charts at end of a month or a quarter or a year. The numbers then become gigantic and scary making the term budget not scary anymore.

Bringing all together.

For those who don't budget at all, the message I wanted to convey is, even the most successful and rich make sure that they allocate their finance correctly- that orderliness and discipline is also one of whys- why they are rich. Note that, accounting doesn't equate with budgeting. Accounting is maintaining a record as you spend, but budget is allocated for what you are going to spend. For both of these, the techniques are going to help you to take better financial decisions. A well planned budget can help us to save a lot of unwanted spending and helps us to foresee the future. These techniques and various tools available can help us to allocate and visualize our funds better. VMFV matrix and 50/30/20 rule can bring tremendous results and clarity.