The first step towards achieving your financial goals is to start working on a budget. A budget is nothing but a tool to keep your spending under control and ensure that the monthly expenses are lower than your monthly income. Here are some tips on how you can make your budget work:
Identify what your budget should comprise of
The first and foremost important factor to make your budget work is to add in components that will actually make your budget a realistic one. A budget should include your family's expenditure and means of income. Under the expenses head include all means of expenses related to you, viz. your debt/loans, EMI, your monthly expenses, etc. and under the income head included all your income sources such as salaries, rent and so on.
By doing so, one could get a clear idea on what your overall expenses and overall income looks like. This can help you to curtail unnecessary expenses and save more.
Know your needs and wants
Spending is unavoidable, but over spending leads to one's future financial situation getting affected.
This limits your ability to build wealth and save money for your family’s future and emergency requirements. To avoid overspending one has to know to differentiate between their wants, needs and luxuries. Remember your needs should be treated first, luxuries or wants are to be treated later (if you have excess of cash left over in your budget).
To make rational decisions regarding certain expenses, the best way is to be disciplined with yourself and reduce the non-essential expenditures. For example, if you find the ‘eating out’ category is very high each month, you can decide to cut down on going out. Impulse spending should also be curtailed, as these are not budgeted for and result in extra expenses. This is very important when you are trying to ensure that there are some savings each month, or at the very least that you breakeven.
Fix a financial goal
Every budget is formed to achieve a certain goal during specific periods of time. Once you have prepared the budget, take into account various priorities, for example, you have to pay off a loan, while at the same time pay for your child’s education. In such cases you have to prioritise your financial goals and save accordingly.
For example, one can pay for the child’s education and at the same time start meeting the minimum EMI and discuss with the bank if it is possible to increase the tenure of the loan so that the EMI amount comes down. This will give one some leeway to make both payments.
Maintain a contingency fund
An emergency/contingency fund has to be maintained as a separate account, apart from your usual savings and investments accounts. It is imperative to keep between two to four months’ of your income as an emergency fund. This should be used only in emergencies and kept aside from other investments and savings. One can use this to fall back in case of any unforeseen situation which leads to loss of monthly income. This fund largely helps you not to erode your savings at times of unexpected situations.
Have an adequate risk cover
It is advisable for you to have a risk cover, as this forms a very important component of investments and it could help your family in times of emergencies. It is advisable to regularly check the cover taken and whether the same is sufficient enough to cover current and future needs: be it for vehicle, home, life or medical, and then make a decision if there is sufficient risk cover or to increase/ change the cover.
Choose optimal investment avenues
It is advisable to invest on a monthly basis (through a systematic investment plan/systematic transfer plan), as this will give one the double benefit of regular investment and compounding as well as negating the possibility of overshooting the budget and hence delaying one’s savings.
Ideally, one should automate this process to avoid any last minute delays in investing. Automating the investment process by a direct bank transfer to a mutual fund/recurring deposit etc. will help in ensuring the savings objective is met and it also curtails the number of impulse spends -- keeping you within budget.
Summary:
- Include all your means of expenses and income sources
- Maintain a contingency/emergency account to fund at times of unforeseen situation
- Have a pure term/risk cover
- Be rational on what you spend, know to differentiate between your wants and needs
- Choose the best investment avenues via systematic investment plan
Photograph: Vivek Prakash/Reuters
Anil Rego is the founder and CEO of Right Horizons, an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.
