The writer speaks on the importance of drawing up a personal budget so that one can stick to their financial goals with confidence
As I write this article, I recall an incident at a party recently where I met an old school friend. We chatted about where we are and what we have achieved so far, recalling common friends and those hilarious incidents in school. The conversation took a serious turn as we started talking about finance – he had many questions for me on his personal finances. One of the statements that he made really stood out for me. The number of people who have asked me this or make this statement is so high, it is almost like the norm to hear, ‘Yaar salary ka paisa kahan gaya pata hi nahi chalta’. The first step of financial planning is to set goals, the second is to know how close you are to achieving them – if your monthly income is Rs. X and so are your spends, then there is no savings and therefore no planning when it comes to meeting your goals. This won’t do. You need to save enough to meet your financial obligations. But how much is enough? Introducing the second step in financial planning – to know ki aapka paisa kahan jaata hai – and how much can you save.
You Are Your Own Finance Minister
In much of India, especially in the financial world, there is great excitement when it comes to the presentation of the Union Budget. Literally the country comes to a virtual standstill as we watch our Finance Minister on the TV or on our phones as she tell us what has happened in the past, the state of the country’s finances and what the coming year holds etc. But you, dear reader, are the Finance Minister of your own home. Where is your Union Budget? You also need to know your expenses – existing and potential, your sources of income and where the money to fund your financial needs will come from.
Doing the hisaab of the milkman and the newspaper vendor at the back of a book is one basic step, and the right one. We need to go above and beyond this.
Adding Structure to the Budget
While a list of expenses is always handy – one should not ignore the other side of the balance sheet – the income. Other than salary there are other sources of income like dividend or interest earned on savings accounts that shouldn’t be ignored.
Your financial advisor should be able to list down all your expenses, no matter how small and your incomes. The difference between the two is savings. Though, in an ideal world, one needs to set aside savings first and expenses need to be managed in whatever the difference is.
So the actual equation is Income – Expenses = Savings, whereas it should be
Income – Savings = Expenses.
Expenses are then categorised into 3 parts:
1. Mandatory expenses (Taxes, EMI etc.)
2. Essential living expenses (groceries, school fees etc.)
3. Discretionary expenses (dining out, gifting etc.)
A good financial planner will tell you to cut expenses from the third part. Parts 1 and 2 are basics and have do be incurred no matter what. It is how one manages the discretionary expense is what dictates the extent of savings.
Have a Plan B
One of the first things a good financial planner will tell you to do is to build a contingency fund.The formula for the same is simple. While you have made a list of the monthly expenses, simply multiply that number by 12. e.g if your monthly expenses are Rs. 50,000 then you need to have Rs. 6,00,000 set aside as your contingency fund. Basically if, for whatever reason, there is no income coming in then you have adequate firepower to help you tide over the rough patch.
Life is uncertain and as covid has taught us, extremely unpredictable. Having set 12 months of expenses aside gives one that much peace of mind when it comes to unforeseen events like a job loss or medical emergency. This contingency fund has to be invested in a place where one can get the money quickly – this is NOT about returns but about liquidity. Invest it in a Liquid Fund, or even a savings bank account, anywhere where you know you can get the money as soon as you need it – without the hassles of visiting the bank or waiting for the transaction to process.
Make your Budget and Stick by It
Thus, if you are serious about your finances then making a monthly budget is absolutely essential. This gives you a good idea of your cash flows and where you can divert your savings to – so that you meet your upcoming financial goals with confidence. Ensure you have a good financial planner you can trust to not only help you make but also monitor the budget and ensures timely interventions in case of cost overruns.
