In the time of crisis, when your income doesn’t grow in proportion to the expenses, it becomes imperative to tighten your purse strings to avoid getting into a debt trap. Budgeting your income also inculcates financial discipline that would go a long way in maintaining your credit- worthiness and could boost your savings. Let’s go through some of the key principles that need to be followed while preparing the household budget.
What is household budget management?
Household budget does not mean just the management of monthly expenditure. It broadly plans for living within your means and ensures future financial security through proper allocation of savings for investments.
A simple way to do this is to label different envelopes with the heads of all the recurring expenses of the month (such as rent, electricity, help, car EMI, etc.). You then know exactly what is going where. If there is any left over, it can either be carried over to the next month, or set aside as a saving. You could also project your monthly income and create accounts fr-om which to debit or credit money as bills are paid and income is received.
Where do you start?
* Begin by making a plan:
Create an inventory of needs and wants, from the biggest to the smallest. Learn to differentiate between needs and wants. Needs are those that are essential to living, and wants are those that make your life better. Categorise between non-negotiable (such as food, rent, clothing, education, transportation, and insurance) and everything else. Or further divide into what is necessary, what is adaptable, and what is expendable.
* Select an appropriate budget format:
You can download these for free from the Internet, or create one of your own. You need to ensure your spreadsheet works on a monthly-cost basis, so all your income and expenses should be multiplied or divided to fit this calculation. A weekly expense should be multiplied by 52 (weeks in the year) then divided by 12 (months of the year) to get a monthly equivalent figure.
* Track your expenditure:
This will establish your spending pattern and allow you to prune out things that can be classified as ‘frills’ and help you become a conscious spender.
Plan expenses
Now that you have an idea of where your money goes, you have to actually keep that in your mind while you spend. And set aside time to review your finances and expenditure on a weekly basis.
* Go local: The supermarket may contain everything under one roof, but if you spend a little time comparing prices, you will find that local shops carry items of the same, or better quality, and at better prices. You are also assured of freshness if you go to the market.
* Prepare for the unexpected: Car repairs, medical costs, weddings and birthdays, appliance maintenance, emergency travel, all qualify as additional expenditure, which you can actually plan for with the help of your spreadsheet as your finances are clearly laid out before you. Reassess the budget after one month, making any adjustments that are necessary. Assess again after three months.
Maintain a good budget
* Share responsibility: If you have a family, then it's very important that they know and understand how your income is distributed over the month, and what it is that you are working towards. You can even ask your children, if they are old enough, to contribute ideas.
* Set targets: Save money on a monthly basis. Don’t succumb to instant credit card purchases or EMI payments on the smaller stuff. In fact, put away your cards.
* Think out of the box: Emergencies are natural and you face cash crunch. However, you need to figure out how you can spend less and save more.
* Review what you want: Differentiate between what is meaningful and what you want only because your neighbours or friends have it.
* Be flexible: A budget is not meant to tie you down. In fact, it gives you defined economic freedom, not financial restriction.
The writer is the CEO of BankBazaar.com