Many a time the salaried person thinks that the CTC (Cost-to-Company) mentioned in the appointment letter divided by 12 will provide him the monthly income. Unfortunately it is not so. There are so many deductions like taxes, EPF, company sponsored food, ESI, Gratuity contribution, medical claim component, LTA, etc which are deducted or can only be claimed. These effectively reduce the monthly income that will actually land in one’s hands.
The previous article on budgeting for salaried people covered the need for budgeting and removed some myths related to budgeting. It also showed how budgeting can be fun when there is proper application of the principles. Toning down and avoiding financial stress was discussed as the key objective for implementing and sticking to a budget. This article will discuss how to go about this.
The Process
Budgeting is not a single event. For the salaried (and anyone for that matter), it is a process of planning, implementation and continuous fine tuning to meet the requirements/objectives. The steps in the budgeting process are as follows:
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Clarity on income
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Capturing all expenses
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Current & targeted savings
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Planning expenses
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Fine tuning
Clarity on income
Many a time the salaried person thinks that the CTC (Cost-to-Company) mentioned in the appointment letter divided by 12 will provide him the monthly income. Unfortunately it is not so. There are so many deductions like taxes, EPF, company sponsored food, ESI, Gratutiy contribution, medical claim component, LTA, etc which are deducted or can only be claimed. These effectively reduce the monthly income that will actually land in one’s hands.
Also add the income that could come from other sources like spouse (obviously), rent, income from deposits, dividends from mutual funds, etc. Remember to add only the income that actually reaches you in cash. Accrued but unrealized income (Eg. interest in a cumulative deposit which is your money but will actually reach your hands only at the time of maturity of the deposit) should not be added to monthly income for budgeting.
Track the Expenses
A list of “all” expenses is to be made. Readymade charts and monthly indexed books are available which will help with this stage. A spreadsheet in a computer will add more muscle to the tracking. Care should be taken to enter all expenses. Without entering the smallest of expenses (tea from a Nair Shop, bus ticket, barber shop expenses included) the process is incomplete.
The data entered is very important for analysis later. The advantage with pre-printed forms and using a computer spread sheet is that, the entry itself can be made in different headings.
Current & Targeted Savings
The difference between the income and current expenses is the current savings. Simple. But the current savings may or may not be enough to meet our future requirements.
Calculations on the need for investment and savings for different future requirements need to be calculated next. Priorities need to be set for achieving different requirements. Based on this the targeted savings can be got.
Planning the Expenses
The best way to plan your finances to gain maximum mileage and cope with very minimal or almost nil financial stress is to exclude your savings and investments, as in set it aside and don’t consider that as income that you can spend. Then use the remainder of the income only for all the expenses. Simply put, Income – Savings & Investments =Expenses
This is the next process step. Once you know the quantum to be saved and invested you can peck on the different expenses to get the savings & investments in reality. This step is not a one day or once effort. This has to be done repeatedly over a period of 3 to 6 months based on the individual’s requirements and aspirations.
The step will also include ways to close off loans as soon as possible. Prioritizing among the loans so that there is savings in the interest paid out. Prioritizing based on the time available to achieve the goals, etc.
Providing for emergency expenses due to job loss, due to a medical emergency, for maintenance of equipments and vehicles, are also part of this stage. It has to be recognized that all these could be provided for only over a period of time. The requirements for each family and individual are unique and have to be customized accordingly.
Fine Tuning
Ongoing fine tuning is the last stage in the budgeting process. Some goal which was not a priority may change its state to be a high priority. For example provision for medical emergency for parents may become a priority after a close uncle has a heart attack.
In increment or pay hike may bring in additional income to meet the requirements for house repainting that you had planned for next year. The repainting could now be done after 6 months itself.
Points to Keep In Mind
Some points that need to be kept in mind while doing the budgeting are:
Be Patient
Things could not be changed over-night. Give yourself time for changing habits. But a commitment to change the financial habits is very much required.
Involve Everyone in the Family
Support from everyone parents, spouse and children is required for implementing a successful budget. Involving everyone will bring in a sense of participation and responsibility to all in the implementation.
Be Consistent
Coordinated efforts in the required direction on a regular basis are required to make the budget implementation successful. Inspite of positive or negative results at the initial stage, consistent efforts are required.
Reward Yourself
Reward yourself and your family members for successful budget implementation. These can be zero budget or near zero budget recognitions like paper stars on the refrigerator for savings in grocery budget or a chocolate / small ice cream cup for the daughter who saved on the budget for her gown.
Summing Up
This article has given tips on how to go about creating and implementing a budget. the 5 steps to a successful budget has been discussed in detail. Tips for implementing the budget successfully have also been discussed. This article is the second and concluding part of the articles on budgeting for salaried people.
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