Budgeting for more money

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Most of the time we don’t get an opportunity to do a planning for monthly income & expenses as expenditures are on continuous basis and demanding.  The process of doing a planning for expenses based on monthly income is known as budgeting. If we do budgeting it is possible to meet our needs even if the income is limited.  

Type of family expense

The expenses in a family have two parts – variable and fixed. The variable expenses can be decided upon whether to incur or not but fixed expenses has to be incurred in any situation to maintain the lifestyle. It includes electricity bills, mobile bills, school fees, gas refilling, EMI etc. Even prior to fixed expenses one should commit an amount towards future needs by way of savings/investment. Once fixed expenses and saving / investments are provided for out of the income, the left over income may be incurred on discretionary expenditures, which is also known as non-essential expense or variable expenses. It includes expense on socializing, eating out, drive out, shop hopping etc.

Please note savings and investment are different.  Savings means keeping a resource aside for future need. While investment means deploying a resource to earn something out of it. Experts suggest that atleast 30% of monthly income should be towards saving/investment.

Budgeting format

Typically a format for household budgeting could be as given in the illustration below.

IncomeAmount
– Salary
– Commission/Interest
– Rent
– Profit
Total income (A)
Saving/Investment
– Mututal Fund SIP
– Public Provident Fund
– Life insurance
– Saving accounts
– Others
Sub total (B)
Fixed expenses
– Household expenses
– EMI
– Insurance
– School fee
– Power bills
– Mobile bills
– Others
Sub total (C)
Non-essential expenses
– Movie
– Eating out
– Long drive
– Party
– Shop hopping
– Others
Sub total (D)
Surplus/Deficit (E) = [(A)-{(B)+(C)+(D)}]

Ideally one should have a surplus after saving/ investment, and incurring all types of expenses. However, life is very demanding now a day and there is a high tendency to spend more. Most of the people fall prey to market forces and ends up with high expenditures and liabilities. Deficit in the budget process indicate this. Therefore utmost care should be taken to live within means and not create unnecessary liabilities.

Types of budget

A family budget will fall in three categories – surplus budget, deficit budget or a balanced budget.

A surplus budget is certainly a matter of joy as there will be left over income after incurring all the expenses. There will not be any financial stress to meet the forthcoming expenses. Still, one needs to revisit the savings/ investments to confirm adequacy vis-à-vis future financial goals. A financial advisor can help you to calculate more accurate cost of the goal and investment needed for it. If more investment is required for financial goals than surplus of budget can help to re allocate the funds for such goals.

In a deficit budget expenses are more than the income, which is undesirable. Therefore it is a high time to check the expenses both variable and fixed. By rationalizing the expenses, one can convert the deficit to surplus. If there are liabilities the same need to be looked into. The high interest bearing liabilities may be paid off with existing saving or deposits.

A balanced budget means there is neither surplus left to carry forward nor any deficit to meet from other source. Whatever earned is either consumed or saved/invested. Again, such budget also needs to be reexamined. If the saving/investment are adequate compared to future financial goals, than there is nothing to worry. But if it is not adequate curtailing certain expenses will be a good idea. It does not mean being miser but being diligent.

Benefits of budgeting – If you look closely you will find most of our time and efforts goes in earning and managing expenditures. We hardly get time to really enjoy living. Further the major cause of stress, physical & mental illness is due to concern for money.

As parent if we do budgeting and live within means it helps children to learn importance and value for money. Budgeting process helps to identify the unwanted expenditure that one is creating and rationalize for future savings/investment. However, a consistent budgeting for over a long period will only yield good results.

At any given time it is always beneficial to maintain a surplus budget. Because you don’t know when you will need more money. This can be achieved by being rational in expenditure or earning more. In current economic scenario both are difficult. However for your financial well being you have to strike a balance. Alternatively, we have to adopt ‘minimalism’ life philosophy. To know about it you may read at https://www.becomingminimalist.com/what-is-minimalism

Disadvantage of budgeting – To maintain a budget the income should be regular or atleast a portion should be certain to flow in. Otherwise budgeting will be a failure. It requires a daily recording or tracking of expenditure which could be time consuming or irritable.

Extra expenditure cannot be met easily when a family makes a budget. Therefore it requires co-operation and understanding of the family members. The housewife becomes tensed when her plan of budget cannot work properly.

How to maintain records

One can start budgeting from today itself for his family using the illustration give above. Please maintain a daily expenditure record and check if you exceeding the variable expenses estimated in the format. You should stop incurring expenditure under variable expense moment you see that it is exceeding the limit set at the beginning. You may declare to the family members that you will not be able incur the expenditure in the current month. Next month, if you still find that expenditure worthwhile and there is surplus probably you can incur that expenditure. It requires emotional control and an assertive attitude. Now a days many apps are available for budgeting. You can download one of them and start using for budgeting and to keep track of your expenditures.

Budgeting is the fist step toward a financial plan of the family. You may read my post http://healthywealthywise.in/financial-planning-for-wealth-creation/ to know about financial planning in details.

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