'Save first, spend the rest': A budgeting approach that's easy to follow

Experienced practitioners may graduate to zero-based budgeting, a more evolved and detailed approach.

You are not alone if you find your salary running out before the end of the month. Around 81 per cent of Indian employees have faced a financial shortfall between pay periods and nearly 72 per cent have resorted to alternative finance options to cover unplanned expenses, said a recent report called 'Earned Wage Access in India: The final frontier of employee wellbeing' by Refyne, an earned wage access (EWA) solution provider, and Ernst & Young.

EWA is a financial product that enables employees to access a portion of their earned salary at any time before their payday and the remaining salary on payday. It helps avoid payday loans (average interest charge around one per cent daily) or going overboard on credit cards, both of which are expensive sources of credit.

Since not every employer offers EWA, and getting addicted to payday loans is dangerous, the most viable option in the long run is to develop the habit of budgeting.  

Budget if

Here, you plan your spending each month and save whatever is left. While this is not the ideal way to budget, it may suit certain people. “This method works for those who earn lower salaries. They need to take care of their needs first, and then save whatever remains,” says Ranjit Dani, Nagpur-based certified financial planner (CFP).

These are people who have more or less fixed expenses and not much left for non-discretionary spends. “They should use this approach and cut down on spending as much as possible.”

Save first

This is a simple approach to budgeting. At the start of the month, put away the amount you wish to save and invest, and then plan your expenses with what is left.  

“Instead of using the equation: income minus expenses equals savings, you use the equation: income minus savings equals expenses,” Dani says.

With this approach, you don’t need to gather a lot of data on your spending habits. “It works well for those who don't want to get too much into numbers. First make your investments, then spend on your bills, and then enjoy whatever is left,” says Mrin Agarwal, founder director at Finsafe.

Begin by keeping aside at least 10 per cent of your monthly income. Increase this figure gradually.

50/30/20 budgeting

This is a more detailed and popular method of budgeting. In the 50-30-20 budget method, 50 per cent is allocated to needs, 30 per cent to wants, and 20 per cent to savings.

Some planners use a modified version of this rule. “We recommend the 30–30–40 rule where 40 per cent should be your savings. 20 per cent is too low,” Agarwal says.

Zero-based budget

This is an approach where your income minus your expenses equals zero. At the start of the month, you allocate the required amount to all the major heads: house rental, grocery, utility bills, transportation, etc. You can also have a “miscellaneous” category for unanticipated expenses, and another one for savings.  

Allocate money to each of these categories until nothing is left. Next, track your expenses during the month to ensure they stay in line with your budget. This is a more detailed planning approach. Allocation to each category at the start of each month should not be automatic but should be questioned and reduced if found superfluous.

This is an advanced method and not for first timers “It's good to track expense but it might get a little difficult to follow it over a long period of time,” . Agarwal says.

Financial planners say that if you find yourself short of funds before the end of each month, then either you must increase your earnings or reduce your expenses. Borrowing can only be a temporary solution. “Borrowing is like a band aid and not a permanent solution. It's important to start with some budgeting method, even if it's very rudimentary. You can graduate to a sophisticated approach later,” says M Barve, founder, MB Wealth Financial Solutions.