Most people merely earn and spend. But if you want your money to stretch far, learn to make a budget
Mid year is the time when people take stock of broken resolutions. Not just those they made on New Year’s Eve but also the promise they made to their financial planner about preparing a household budget.
As the finance minister takes the stage in Parliament to present the Union Budget, the financial consultant casts a sidelong glance at his client, prompting an apology and a fresh promise. The exercise is repeated the following year.
The economic situation in India has come a long way from the time when the man of the house would hand his wife a fixed sum of money every month which she would spend, and save, in a diligent manner. Unlike before, both partners are earning and spending, not just by cash but cheque and credit card as well. So there are multiple points of inflow and outflow of money in a family. This makes it difficult to keep track of expenses.
Where did all the money go?
Planners advise their clients to take the first step by simply writing down their daily expenses in a small notebook. But a combination of factors has led people to abandon the concept of a household budget.
The family income is augmented now that both partners are working and salaries have increased. Young couples who do not have children are seldom motivated to keep track of their expenses. They own a house and car and have nothing to save for. Moreover, after a long working day all they want to do is spend time with each other rather than list the day’s expenses.
But the right way to keep money is to know where it is going. Those who keep track get valuable insight about their wasteful expenditure patterns. A couple whose goal to buy a house was thwarted because they did not have the courage to go in for a home loan. It was only when they began to tabulate their daily expenses that they realized they were spending almost Rs 15,000 on eating out and entertaining each month. Once they saw the pattern, they were motivated to lessen their indulgence and the EMI on a loan became an attainable goal.
On track with saving and spending
Most people merely earn and spend. Some do note down their expenses. But few are aware of the thumb rules of h o u s e h o l d budgeting.
Writing a budget, for instance, involves putting aside a contingency fund that covers three months’ household expenses. Not more than 40% of your income should go toward paying off loans, and only 25% towards home loans. Ideally, 10% is to be invested, although Indians score better in this respect by often investing up to 25%.
The process of inculcating a budgeting habit is slow. In the first quarter, experts advise clients to make a note of one-time purchases, like clothes, for instance. Weekend purchases are added in the second quarter, and then expenses that are incurred 12-15 times a year are added to the list. In the second year, categories like groceries, school fees and bills are assigned. Mashruwala begins the actual task of budgeting only in the third year when the process of noting down expenses has been streamlined.
Writing a budget is not about curtailing expenses or saving more. It is about being aware of your spending pattern. Each of us has a rough idea of the amount we spend on groceries, electricity and telephone bills, cable TV, shopping and entertainment, and yet there are broad patterns that escape our attention.
A young couple who began to write their accounts found they were spending Rs 18,000 annually on telephone bills. They changed their cell phone handsets every year, spending about Rs 12,000 in the bargain. Internet surfing cost an extra Rs 7,000. As a result, the total annual expenditure on communication was about Rs 30,000, and hardly any of it was related to work. They used a credit card on their weekend outings, spending about Rs 2,000-3,000 each time on malls, movies and dinner. The amount shocked them.
Positive cash flow, but no profit
Yet, the purpose of writing a budget is not to curtail expenditure. Go ahead and spend all you want, but be aware. Once you budget, individuals will discover that they may be making lots of money but are merely spending it instead of generating wealth in the long term. Companies will find their cash flow is positive but the profits are not coming in.
Like the finance minister in his Union Budget must manage the inflow of money in terms of direct and indirect taxes, interest and borrowing and channelizes it towards various heads of outflow like defense, agriculture and education, the household budget must strike a balance between income and expenditure because imbalance could result in deficit or loss.
For this reason, experts advise parents to inculcate the habit of budgeting in little children when they give them money for pocket expenses. A child who merely learns to spend will instead learn to manage money.
Keeping tab can throw up some pleasant surprises at times. A media professional from Delhi who moved to Mumbai kept note of her regular expenses for a few months without curbing her lifestyle in any manner. To my surprise, I found that I could not only live comfortably, but also indulge myself occasionally,” she says. “I can now enjoy guilt-free spending because I know I have budgeted for it.
HOW TO PREPARE A HOUSEHOLD BUDGET
Begin by making a note of one-time purchases, like clothes or a new cell phone handset. Do so for three months Add weekend expenses in the second quarter, which includes trips to the movies and eating out.
At the end of the first year add the expenses that are incurred 12-15 times a year like telephone bills or cable TV charges.
In the second year, enter categories like groceries, school fees and bills into your notebook and list expenses under each head diligently
Once you are accustomed to making notes of all purchases, begin to see whether you need to cut down on wasteful expenditure. You may be pleasantly surprised to find you are managing well within your means and can enjoy the occasional guilt-free indulgence
Mid year is the time when people take stock of broken resolutions. Not just those they made on New Year’s Eve but also the promise they made to their financial planner about preparing a household budget.
As the finance minister takes the stage in Parliament to present the Union Budget, the financial consultant casts a sidelong glance at his client, prompting an apology and a fresh promise. The exercise is repeated the following year.
The economic situation in India has come a long way from the time when the man of the house would hand his wife a fixed sum of money every month which she would spend, and save, in a diligent manner. Unlike before, both partners are earning and spending, not just by cash but cheque and credit card as well. So there are multiple points of inflow and outflow of money in a family. This makes it difficult to keep track of expenses.
Where did all the money go?
Planners advise their clients to take the first step by simply writing down their daily expenses in a small notebook. But a combination of factors has led people to abandon the concept of a household budget.
The family income is augmented now that both partners are working and salaries have increased. Young couples who do not have children are seldom motivated to keep track of their expenses. They own a house and car and have nothing to save for. Moreover, after a long working day all they want to do is spend time with each other rather than list the day’s expenses.
But the right way to keep money is to know where it is going. Those who keep track get valuable insight about their wasteful expenditure patterns. A couple whose goal to buy a house was thwarted because they did not have the courage to go in for a home loan. It was only when they began to tabulate their daily expenses that they realized they were spending almost Rs 15,000 on eating out and entertaining each month. Once they saw the pattern, they were motivated to lessen their indulgence and the EMI on a loan became an attainable goal.
On track with saving and spending
Most people merely earn and spend. Some do note down their expenses. But few are aware of the thumb rules of h o u s e h o l d budgeting.
Writing a budget, for instance, involves putting aside a contingency fund that covers three months’ household expenses. Not more than 40% of your income should go toward paying off loans, and only 25% towards home loans. Ideally, 10% is to be invested, although Indians score better in this respect by often investing up to 25%.
The process of inculcating a budgeting habit is slow. In the first quarter, experts advise clients to make a note of one-time purchases, like clothes, for instance. Weekend purchases are added in the second quarter, and then expenses that are incurred 12-15 times a year are added to the list. In the second year, categories like groceries, school fees and bills are assigned. Mashruwala begins the actual task of budgeting only in the third year when the process of noting down expenses has been streamlined.
Writing a budget is not about curtailing expenses or saving more. It is about being aware of your spending pattern. Each of us has a rough idea of the amount we spend on groceries, electricity and telephone bills, cable TV, shopping and entertainment, and yet there are broad patterns that escape our attention.
A young couple who began to write their accounts found they were spending Rs 18,000 annually on telephone bills. They changed their cell phone handsets every year, spending about Rs 12,000 in the bargain. Internet surfing cost an extra Rs 7,000. As a result, the total annual expenditure on communication was about Rs 30,000, and hardly any of it was related to work. They used a credit card on their weekend outings, spending about Rs 2,000-3,000 each time on malls, movies and dinner. The amount shocked them.
Positive cash flow, but no profit
Yet, the purpose of writing a budget is not to curtail expenditure. Go ahead and spend all you want, but be aware. Once you budget, individuals will discover that they may be making lots of money but are merely spending it instead of generating wealth in the long term. Companies will find their cash flow is positive but the profits are not coming in.
Like the finance minister in his Union Budget must manage the inflow of money in terms of direct and indirect taxes, interest and borrowing and channelizes it towards various heads of outflow like defense, agriculture and education, the household budget must strike a balance between income and expenditure because imbalance could result in deficit or loss.
For this reason, experts advise parents to inculcate the habit of budgeting in little children when they give them money for pocket expenses. A child who merely learns to spend will instead learn to manage money.
Keeping tab can throw up some pleasant surprises at times. A media professional from Delhi who moved to Mumbai kept note of her regular expenses for a few months without curbing her lifestyle in any manner. To my surprise, I found that I could not only live comfortably, but also indulge myself occasionally,” she says. “I can now enjoy guilt-free spending because I know I have budgeted for it.
HOW TO PREPARE A HOUSEHOLD BUDGET
Begin by making a note of one-time purchases, like clothes or a new cell phone handset. Do so for three months Add weekend expenses in the second quarter, which includes trips to the movies and eating out.
At the end of the first year add the expenses that are incurred 12-15 times a year like telephone bills or cable TV charges.
In the second year, enter categories like groceries, school fees and bills into your notebook and list expenses under each head diligently
Once you are accustomed to making notes of all purchases, begin to see whether you need to cut down on wasteful expenditure. You may be pleasantly surprised to find you are managing well within your means and can enjoy the occasional guilt-free indulgence
