Planning your Family Budget

New year is here - while national budget is being prepared with a lot of vigor in the election year to impress voters, we have the responsibility to prepare a budget for our homes. Some of us may wonder if budgeting is of any use at all as most of our income anyway gets spent every month. This may be true in the initial income earning phase, when our incomes are lower but as we progress in our lives and career, annual planning of home budget greatly helps provide a disciplined approach to track our expenses in a structured manner.

A Sample home budget

Let us help Bharath, age 34, an administrative executive, prepare his annual home budget for 2019. He lives in a rented house with his wife and two children aged 5 & 3. His monthly take home pay is Rs.40,000 and he is a single income earner for his family.

Bharath’s primary expense comprises his rent of Rs.10,000 and he spends another Rs.8,000 on food. His utilities and petrol/transport expenses comes to Rs.4,000. These basic expenses totals to Rs.22,000, close to the national average of Rs.20,000 p.m.

Bharath sends his children to private school, where the annual fees along with school uniform, books and shoes comes to Rs.30,000 p.a. On an average children’s schooling expenses works out to Rs.2,500 p.m. Further he sends Rs.4,000 to support his elderly parents back in his native place.

On the liabilities side, Bharath has an EMI of Rs.2,000 outgoing every month for his bike. Once this EMI finishes, his family plans to buy other white goods such as washing machine or air conditioner. So, the EMI expense is most probably a fixed expenditure item on his budget.

Bharath also sets aside Rs.500 for medical expenses and Rs.1,000 for entertainment or travel expenses each month. In total, all of his expenses adds up to Rs.32,000. These expenses form about 80% of his total income and leaves him with a balance of Rs.8,000 to save/invest.

Bharath’s savings of Rs.8,000 forms 20% of his income. His savings rate is slightly above that of the national average household savings rate of 16.3%. In the recent years, due to increased consumption, Indian households have taken on a lot of debt and as a result their net savings rate have dropped. Fortunately Bharath does not have huge liabilities to his credit.

Saving for the future!

The foremost thing for Bharath to do would be to build a 3-month emergency kitty covering his monthly expenses for Rs.96,000 (Rs.32000 *3). As his annual savings is itself Rs.96,000, he could first consider building a 1-month emergency reserve in the initial 4 months (Rs.8000*4).

After building the family reserve in 4 months, the next high priority area for him is to buy a health insurance policy for his family. He could start with Rs.3 Lacs cover for Rs.6000-8000 p.a initially and then top it up in the later years when his salary rises. Bharath could also consider buying a term policy to provide a Rs.50-75Lacs life cover for himself. Should something happen to his life, his family could get a claim amount of Rs.50-75Lacs.

Beginning the 5^th month, he could invest his monthly savings of Rs.8,000 towards his other life goals such as building a corpus for the down payment of his home or for his retirement. Bharath has many options to save towards his future. He could use the traditional and more popular recurring deposits (R.D) at banks / post office or he could commence a SIP (Systematic Investment Plan) in equity mutual funds. An R.D for Rs.8000 would grow at 8% rate returning Rs.5.87 Lacs at the end of 5 years (vs) the market linked SIP, which could provide him with Rs.6.53 Lacs at 12% return.

How does budgeting benefit you?

First and foremost, budgeting gives you a complete sense of control over all your cash outflows. As you are well aware of all the priority areas that needs to be funded every month, you may not succumb to peer pressure or indulge in unwanted consumption.

The second biggest benefit of budgeting is channelizing excess cash towards future. Any unspent amounts towards a particular head such as travel or medical could be used to boost investment/savings. Say Bharath’s SIP investment of Rs.5,000 p.m in an equity mutual fund over 5 years @12% return fetches him Rs.4.08 Lacs. In case he invests his bonus of Rs.24,000 in the same fund every year, his returns at the end of 5 years gets boosted by Rs.1.52 Lac, giving him a total of Rs.5.6 Lacs.

The third biggest benefit of budgeting is inculcating the value of money in children. Make a practice for every member of the family including children, to write down the expenses they make in the day in an expenses book. Then encourage children to do weekly/monthly totals and discuss over/under-spends in their presence. In this way they learn to become money smart as they grow up.

Finally, budgeting helps you re-allocate funds to certain areas in your life that needs more money and curb high spend areas, if any. When you receive a pay hike or bonus, you would know exactly where to put your money rather than get carried away by unwanted expenditures. So, start planning your home budget and reap its benefits for life!