<b>Your Money:</b> Making a household budget is tedious, but fruitful

Start small by noting down expenses for a month and then decide on allocation

Most families, over the years, have this common lament:  Their incomes have risen at a decent clip but savings continue to languish. And, this could happen because the family isn’t nimble to changes. 

For example: With Reliance Jio offering dirt cheap rates on data, competitors Airtel and Vodafone have come up with similar packages. The question is how many have taken the trouble to change their mobile plans to take advantage of this. From the days of Rs 1,000-plus mobile bills, one can possibly bring it down to Rs 500-600 if careful. That is a saving of almost 50 per cent. 

Similarly, a rise in salary could be accompanied by change in lifestyle. For example: Using cabs and cars more often than buses or metro, eating out more often or watching more movies in malls. These tend to make a significant dent in the monthly budget. While no financial advisor would advise that one should not have lifestyle expenses, there is definitely a need to track these. A household budget comes handy. 

Saving every bit counts: Sample this. You save Rs 20,000 a month in a mutual fund. At average returns of 12 per cent, you would have Rs 1.86 crore at the end of 20 years. But, if you would have increased this by only 10 per cent or Rs 2,000 a month (or Rs 4.8 lakh for 20 years), you would end up with Rs 18 lakh more and have a corpus of Rs 2.04 crore. 

“Once an individual realises the unnecessary expenses, the allocation to savings and important spending can happen automatically,” says Tarun Birani founder and chief executive officer, TBNG Capital Advisers.

Designing a budget: Planning a budget can be tedious. If a first timer, keep it simple. Improvements can always be made later. There are four components of a budget: Income, investments, fixed expenses (mandatory and discretionary) and variable expenses (mandatory and discretionary).

“Never start with the variable expenses, as the number of entries are high. A person gets overwhelmed noting these and gives up budgeting in most cases. It is best is to start with income, then move to investments, followed by fixed expenses and finally variable expenditure,” says Gaurav Mashruwala, a Mumbai-based certified financial planner. 

Fixed mandatory expenses are those which will not change through the year. These include equated monthly instalments, school fees, insurance premiums and so on. Fixed discretionary expenses include magazine subscription, gym membership, etc. Variable mandatory expenses include clothes, transport, utility bills, and so on and variable discretionary are eating out, watching a movie, meeting a friend over coffee.

“Before the financial year starts, give it half a day. It usually takes about three months to fine tune and capture most of the income and expenses. Hence, keep the allocation to different heads flexible. It’s only after completing one financial year that an individual can hold rigid targets,” says Arvind Rao, founder of Arvind Rao and Associates. Once you know the income and outgo, it’s easier to make changes and allocate money from one pocket to another.

Strategies: The 50-20-30 budget is a proportional guideline that can help you keep your spending in alignment with your savings goals. It can come handy for those with no or little family commitments. Here, 50 per cent of your income should be set aside for absolute necessities such as housing, food, transportation and utility bills and 20 per cent should be allocated to savings. The rest is for discretionary spends that can be used for outings, lifestyle purchases and so on.

Then, there’s a system called “The 60 per cent Solution”. In this, 60 per cent of the income should be spent on fixed expenses. Of the other 40 per cent, allocate 10 per cent to each of the following categories —retirement savings, long-term savings, irregular expenses and fun money. If you have personal loans or credit card dues, use the retirement and savings money to pay off the debt. 

Involve family: Many couples have a different attitude towards money. One could be a spendthrift, while the other could be a saver. Such couples should approach budgeting differently. “They should fix the amount both of them will save each month, share the burden of mandatory expenses and splurge the rest the way they wish to,” suggests Lovaii Navlakhi, founder and chief executive officer, International Money Matters.

“To get your children involved, ask them to note the money they are spending. Parents should ensure they are doing it. Once children see parents tracking their expenses, they are likely to follow suit,” says Mashruwala.

Avoiding pitfalls: To make the budget a success, start with only noting expenses for a month and then start planning. If you have unrealistic budget allocations, either too tight or with too much leeway, you will not be able to stick to it. Ensure that at the end of every month, there’s no idle money in the bank, else you might end up utilising it for discretionary spending. 

Most self-employed individuals usually mix their business and personal money. In such a scenario, it’s not possible to stick to a budget. Birani suggests such people give themselves a fixed salary every month. You can also opt for two bank accounts — one for expenses and loans and the other for savings and investments. Segregation of the money will help in sticking to the budget. “Many employees use their salary account for investments. When they move to a new company, they get a new account and close the previous one. It can also lead to problems during redemption if you need money urgently,” says Rao.