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Mar 07, 2012, 06.17 PM IST
Here is a look at why you should have your own personal finance budget and how to do it.
We have entered March, the last month of what will soon become the old Financial Year. On March 16th, the new Union Budget for FY 12-13 will be presented. There has been plenty of news coverage on the possible Budget outcome, and a fair amount of criticism of the Government’s spending habits as well.
Our country’s fiscal deficit is more than double of what it was last year due in part to a low tax base and in part to high government spending. While the former can be alleviated to some extent if and when the Direct Tax Code comes in, it is the latter – the high government spending – that is the more worrisome factor.
When any entity, a government, a company or you – an individual – finds itself in a deficit jam , you know that budgeting issues are most likely the root of the problem. Not only is budgeting important to avoid getting into too much debt, it also does good things for your credit score . The key to resolving these issues is to adopt a disciplined approach to revenue and spending i.e. have a sensible budget and stick to it.
Let’s see why you should have your own personal finance budget and how to do it.
Why bother to budget?
The first and biggest requirement for a secure financial future is saving and investing the right amount of money into the right investment avenues, at the right time.
Saving is dependent on controlling of expenses, and this can be done with effective and easy budgeting.
The fact is simple: if you can’t save, you will never be really wealthy.
Are You Cash-Flow Savvy?
While everyone knows how much they earn per month, not everyone is aware of how much they spend each month. Take your own monthly finances as an example. Off the top of your head, try and list the broad breakup of your monthly expenses. Your categories will likely include:
1. Rent / society bills
Once you have a handle on your primary expenses, you will be able to identify those areas that you feel you are spending too much on and plug the cash flow leak. Once the decision to cut back is made, it is followed by the relatively more difficult part of sticking to this decision and choosing not to spend. This is where your budget will serve as a guideline.
For example, a cash flow awareness exercise was conducted for one of our clients Mr. Parikh (name changed to protect privacy) very recently. Before the exercise, Mr. Parikh was under the impression that the majority of his expenses were household, fuel and utility related. After tracking his expenses diligently for a month, he was surprised to learn that he was spending nearly 25% (roughly Rs. 35,000 every month) of his monthly take home salary on family dinners at fancy restaurants, gifts and other such entertainment. This high level of discretionary expenditure left him with comparatively low investible surplus each month, so he contributed Rs. 15,000 per month to investments towards his family’s life goals.
After the exercise, Mr. Parikh implemented a budget.
He allocated reasonable expense figures to each of his categories, keeping in mind his family’s regular necessities and comforts, and set an upper limit on discretionary spending.
On a daily basis, he recorded his expense figures and asked his spouse to do the same.
Now, about three months later, after diligent tracking and cutting back, he spends Rs. 15,000 on discretionary expenses, and invests Rs. 35,000 each month towards his children’s educations, a new car next year and his own retirement.
3 Things to Include in Your Budget Exercise
1. Remember to track irregular expenses
2. Remember to Include Your Family
3. Review Your Budget and Your Progress Once a Month
Last but not least, keep in mind that budgeting is a means to an end. You are budgeting because you want to achieve certain cherished life goals. So continue to think positively and keep your family and yourself motivated, and you will slowly and steadily achieve your family’s dreams .
PersonalFN is a Mumbai-based personal finance website.
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