I REMEMBER a song, which goes like this: I got the money in hand and have not even pocketed it, but it has already vanished! That seems to be the problem with a lot of people. Many of those who come to us for financial planning have a problem enumerating expenses. We get requests to accept ballpark, lumpsum figures, which we totally militate against. The problem is, the ballpark figure is seldom correct.
Mostly, it tends to be an inflated. We prefer the long route of jotting down the amounts spent, item by item.
It is painful, agreed. But that is what can give a fair idea of what you are spending and where the money is going. Again, different expense items will go up at different rates in future. Only if it is clearly spelt out, future expense projections will be accurate.
Often, the total expenses arrived at this way tend to be lower than what one is actually spending. One needs to give some more thought to it so that s/he can come up with additional items, where money is spent. Sometimes, the brain does not cooperate! It is a good idea to understand what the items of expenditure are and how much one is spending under each head. As a planner, I would suggest one should not go by what one is spending or wants to spend. Rather, one should arrive at what needs to be saved for meeting various goals and, after that, what is left is what can be spent.
Assign priority to each goal as well as the savings required for each one of them. Once you assign your savings for each of the goals, spending will not be much of a problem.
While making a budget with the amount available, one needs to give priority to items that cannot be eliminated. Items like provisions, utility charges and school fees cannot be ignored and will be the first claimants to the available resources. They are tier-I expenses. The thing to do is to assign a range within which spends on the indispensable items, needs to be confined.
There are some stretchable items like conveyance.
They are fixed to some extent and can also be variable. For instance, one always has the option to drive to work on all days or most of the days. For some, car pooling has worked. Hence, the band will be wide. These and others like these are tier-II expenses.
There are other expenses, which are discretionary. Spends on entertainment, eating out, outings, picnics and gifting are those that can be dispensed with, if necessary. Hence, the expense band is truly elastic.
Spends under this head can vary. For instance, if the budget for entertainment is Rs 5,000 and if there are other extraordinary expenses in a month, this head may get affected.
If tier-I spends somehow breach budgeted figures, then tier-II or tier-III expenses will get affected.
It stands to reason that tier-III will be the first to get affected. After that tier-II will be affected in the sense that it may be pushed to the lower level of the band. The same thing will also need to be done if there are extraordinary expenses that have not been anticipated.
An important thing in budgeting is to be realistic about projecting expenses and then budgeting for them.
It is important to identify different categories correctly. Also, there needs to be a buy-in by all family members for it to be effective. Else, the budgeting done will only remain on paper.
It is important to anticipate extraordinary expenses that could come up and make provisions for them. In many cases, we do make a miscellaneous provision to handle such unforeseen expenses. These expenses are handled using liquidity margins, specific provisions made or contingency provisions made for specific situations such as medical emergencies.
The most important benefit of budgeting is that one realises how much is the outflow every month. For many, this budgeting exercise is a revelation. Coupled with the "invest first, spend later" principle explained earlier, it will bring in the discipline required. The person who sang the song I talked about in the beginning, probably never budgeted and hence overspent. Now, you know it better!
