5 Steps to create a household budget
Budgeting is the cornerstone of financial planning. After all, if you don’t know how much you spend, and on what, it will be difficult to save adequately for your financial goals. Worse, you may not have the money when you need it. Find the answers to these five questions before you start budgeting.
1 What’s your actual income?
Your real income is what you actually pocket each month, commonly referred to as take-home salary. Don’t consider your CTC as income because a part of this will only be available to you at the end of the year. Also, it’s quite possible that you may not get the entire amount of variable pay that you had been promised, so you can’t afford to bank on such irregular income. This is true even for bonuses, dividends and monetary gifts. However, you can include rental income while calculating your earning for each month. The only qualifier for an income here is that the amount is fixed for the entire year.
2 How much do you spend?
Collect all the bills and receipts for the past six months. Then make a list of what you have bought and how much you have spent. Include everything, from grocery to gym fees. Don’t forget to add smaller expenses, such as the newspaper bill or car wash spending. To ensure you don’t miss out on anything, crosscheck with your credit card and bank account statements. This will also help you remember what you did with the money that you withdrew from the ATM. Repeat this exercise for 2-3 months till you have an idea of your average monthly outgo. Within this category, make two lists: mandatory expenses, such as school fees and rent, and discretionary spends like eating out. This will make it easier to know where you can cut costs.
Collect all the bills and receipts for the past six months. Then make a list of what you have bought and how much you have spent. Include everything, from grocery to gym fees. Don’t forget to add smaller expenses, such as the newspaper bill or car wash spending. To ensure you don’t miss out on anything, crosscheck with your credit card and bank account statements. This will also help you remember what you did with the money that you withdrew from the ATM. Repeat this exercise for 2-3 months till you have an idea of your average monthly outgo. Within this category, make two lists: mandatory expenses, such as school fees and rent, and discretionary spends like eating out. This will make it easier to know where you can cut costs.
3 What are your goals?
Write down all your financial goals and the time period within which you want to achieve these. Include everything you aspire for, from buying a laptop in the next six months to a comfortable retirement after 30 years. In case you have taken a loan, repayment should also be included in your goals. If it’s a long-term goal, calculate how much it will cost if you take inflation into account. This is important since you may find yourself drastically short of money when you buy the desired object. There are various inflation calculators available on the Internet that can help you with this. You can go with an inflation rate of 6-8%.
Write down all your financial goals and the time period within which you want to achieve these. Include everything you aspire for, from buying a laptop in the next six months to a comfortable retirement after 30 years. In case you have taken a loan, repayment should also be included in your goals. If it’s a long-term goal, calculate how much it will cost if you take inflation into account. This is important since you may find yourself drastically short of money when you buy the desired object. There are various inflation calculators available on the Internet that can help you with this. You can go with an inflation rate of 6-8%.
4 Do you have any savings?
We’re hoping that you do have some savings, even if it’s just the contribution to the employee provident fund or an insurance plan. List all such savings and the time period after which you can redeem these investments without paying a penalty. Correlate to see whether any of these will be able to fund a financial goal substantially. To know how much your savings will grow after the desired time period, you can use the ‘final worth of investment’ calculator on our website economictimes.indiatimes.com/personal-finance/financialcalculator/calculators.cms. Add your monthly savings and expenses. This should be equal to your take-home pay. If it’s less, it means you aren’t investing your savings properly. Warning bells should sound if the sum is more since you’re obviously living beyond your means. 5
What’s the difference?
Compute the corpus you need to fulfil all your long-term goals as well as the proportion that can be funded through your current savings. The deficit will tell you how much more you need to save. To figure out how much you will need to invest every month to achieve your goals within the required time period, you can use the ‘savings target’ calculator on our website. Do you have the necessary amount each month that can be invested or are you living hand to mouth? If you don’t have any investible surplus, you should take a hard look at your expenses and figure out which ones can be cut down. For instance, can you opt for carpool on some days and save on fuel? Can you reduce your culinary expeditions to just once a fortnight? If you do have a surplus, you will have to consider where to invest. This, of course, requires more work and where you should invest depending on how much risk you are willing to take.
We’re hoping that you do have some savings, even if it’s just the contribution to the employee provident fund or an insurance plan. List all such savings and the time period after which you can redeem these investments without paying a penalty. Correlate to see whether any of these will be able to fund a financial goal substantially. To know how much your savings will grow after the desired time period, you can use the ‘final worth of investment’ calculator on our website economictimes.indiatimes.com/personal-finance/financialcalculator/calculators.cms. Add your monthly savings and expenses. This should be equal to your take-home pay. If it’s less, it means you aren’t investing your savings properly. Warning bells should sound if the sum is more since you’re obviously living beyond your means. 5
What’s the difference?
Compute the corpus you need to fulfil all your long-term goals as well as the proportion that can be funded through your current savings. The deficit will tell you how much more you need to save. To figure out how much you will need to invest every month to achieve your goals within the required time period, you can use the ‘savings target’ calculator on our website. Do you have the necessary amount each month that can be invested or are you living hand to mouth? If you don’t have any investible surplus, you should take a hard look at your expenses and figure out which ones can be cut down. For instance, can you opt for carpool on some days and save on fuel? Can you reduce your culinary expeditions to just once a fortnight? If you do have a surplus, you will have to consider where to invest. This, of course, requires more work and where you should invest depending on how much risk you are willing to take.
Namrata Dadwal ETW120611
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