Budgeting is not a popular choice. Who likes living with restrictions?
So, thumb rules for financial planning like the famous 50:30:20 rule espoused by Elizabeth Warren may not be applicable to all. And why should it be?
WHAT IS THE 50:30:20 RULE?
It says one should allocate 50% of income to essential expenses, 30% to discretionary expenses and save 20%.
If your income is much higher than your expenses, you can save more than 20%.
In case you are starting life with an internship or entry level job, the income may just be enough to cover essential expenses. The idea here is to increase income, as well as learn cost-cutting till the situation improves.
WHEN DOES BUDGETING COME IN THE PICTURE?
Budgeting is a tool to manage money, when resources are limited and expenses look set to blow up a financial plan. It is a strategy to spend wisely, and has nothing to do with investing.
You need a budget when you don’t know where your money goes.
IF YOU ARE IN THE HIGH-INCOME BRACKET
You need an investing budget. Decide the amount you can save every month.
Savings can be allocated to different sections
- Emergency funds
- Provision for annual payments like insurance premiums, membership fees etc.
- Provision for annual expenditure like a holiday, festivals, visits from extended family.
- Monthly investments like a Systematic Investment Plan or Recurring Deposit
- Annual investments like Public Provident Fund, small savings schemes or annuity plans
- Sporadic investments like direct equity
You may choose to hire a financial planner. Rich people focus on what they do best to earn money. They don’t spend hours watching market trends or learning new strategies.
IF YOU ARE IN THE MIDDLE-INCOME BRACKET
Think of what makes you feel rich. Think of what makes you feel poor.
Your financial goals will lie between the two stages.
50:30:20 rule may be twisted to 40:30:30 or 30:30:40 in line with your income and aspirations.
You will make budgets in the segment for discretionary expenses or lifestyle expenses or wants as we call those. This is the area where you can afford to postpone or forego a few things, in order to meet a higher financial goal.
Be clear in your concepts of what is important to you. A Netflix subscription may be only Rs.500/- in a month, but are you really using it? Are there other wasted subscriptions or items you buy on impulse and dump?
Is it a better idea to hire a cook than ordering unhealthy meals on a food delivery app? You can still enjoy an occasional treat.
If a gadget needs to be replaced urgently, or an insurance premium to be paid, you can postpone buying a new bag or shoes.
Budgeting is not about scrimping on money. It is about directing money to the goals that matter to you in life.
Explain the logic of doing this to family members and carry them with you.
You may want to check out this free 15-minute course on Money Management without Maths
IF YOU ARE A BEGINNER IN FINANCIAL PLANNING
You may choose to follow thumb rules.
- They provide a direction to for DIY financial planning.
- They remind you of certain things which may have slipped your mind.
- They help you inculcate financial discipline.
The point is that absolute figures matter more than percentages. And that number differs for different individuals. Hence, one should be prepared to bend the rules a bit and create new rules to suit your level of income and financial goals.
No amount is too big or too small to save. It appears to be so, in comparison with the benchmarks you’ve set for yourself. Re-examine the benchmarks.
HOW BUDGETING HELPS YOU
Your budget should not be a mark-up budget which says you or your friends have been spending this amount. So, you go ahead with the same or an incremental figure.
Zero-budgeting is a concept where we examine every cost afresh and question its relevance to your present situation.
It is not necessary that you eat out in the same upmarket joints where you dined with your parents. You aspire to buy a car, but have you calculated the cost of maintaining it? And the depreciation in value? Can your money grow better elsewhere, if you use public transport, or ask a friend to pick you up?
Free budgeting apps, budgeting tools and budgeting software are all for you. Explore those and learn to harness them to serve your purpose.
I know people who opt for a credit or debit card with cash back facility. The cashbacks are then put into a fund earmarked for lifestyle or discretionary expenses.
Have you considered micro-investing? If the amount invested is less than Rs.100/-, the returns won’t be phenomenal. But it gets you in the habit of saving money and investing it.
You learn that savings should not be idle money. Your money should earn money while you sleep.