Your Family Budget 2011

On this Budget day, resolve to be the finance minister of your family. Make an annual household budget that will help you attain financial discipline and meet your goals, says Babar Zaidi

10 REASONS TO MAKE A BUDGET
Everyone needs to make a household budget but if you find yourself saying any of the following statements, you need one more than anybody else. "Spending money makes me feel good." "I let others handle my financial matters." "I rarely balance my bank account statement." "I often borrow small amounts for short-term needs." "If I lost my job today, I won't be able to pay my next EMI." "I don't know my total debt obligations." "There's nothing left to save after my expenses" "I don't know where all the money goes." "I am often slapped with late payment charges." "I have so many bills to pay I don't know where to start."
    Preparing the Union budget is an enormous responsibility. An army of officials led by the Finance Minister balances the income and expenses of the nation. You have a similar responsibility. As the finance minister of your house, you are answerable to your family about where and how every rupee entering the home coffers is utilised. You have to distribute resources optimally, avoiding wasteful expenses, yet ensuring that all the stakeholders get an adequate slice of the family money pie. To be able to do this, you need to draw up a family budget. The word budget immediately conjures up images of a frugal life devoid of any indulgences. Many see it as the financial equivalent of a diet plan, which cuts them off their favourite snacks. But it need not be so. A budget is not meant to restrict your spending, rather help you spend as per your plan. It tells you if you are overspending in a particular area and prevent "deficits" from building up. Do you really need a budget? Find out by taking this test: How much did you spend on eating out last month? We did a dipstick survey and found that four out of every five people were not sure how much they had spent under this head. "People have a rough idea of how much they spend in a month on running the household, but the small discretionary spending escapes notice. This can add up to a neat sum in a month," says Mumbai-based financial planner Chhaya Kothari. Don't mistake eating out and takeaway meals for a minor expense. Over the past decade, its share in the wallet of the average urban consumer has increased and currently stands at 4-5%. In a year, it takes up more than half a month's income. According to a report by McKinsey & Company, such discretionary expenses will increase in the coming years and could reach almost 10-12% of the income by 2015.
    We are not suggesting that you stop eating out or reduce it to a bi-monthly outing to a dhaba. All we are saying is that you need to have a budget for it, as also for all other expenses. It will help you understand where your money is going and how you can allocate funds optimally. "Budgeting helps you set your financial goals and creates a mechanism for you to achieve them. Unless you know how much money you have and how it is spent, you will never be able to formulate an investment plan," says Mumbai-based financial planner Pankaaj Maalde.
Write it down
Start by writing down the various sources of income—salary, rent, interest on deposits, dividends, etc. Then make a list of expenses incurred in a month and allocate money to each of these heads. Include everything, from the grocery bill to what you pay the maid, from the fuel expenses to the EMI of the car. Anything and everything that is paid for should be in the list. For some expenses, such as school fee or insurance premium, which are paid every quarter or once a year, you may have to calculate the monthly figure.
    Be realistic in your allocation of funds. Cutting down on some discretionary expenses could create a stir in the household, which would defeat the purpose of the exercise. Just like the Finance Minister reaches out to the industry and other taxpayers before embarking on the budget preparations, you must also talk to the stakeholders and incorporate their views into your calculations. Here's a tip: if the teenager constituency is upset with cuts in spends on Domino's pizzas, assuage their feelings with higher allocations to gizmos and clothes. It's a neat trade-off between consumption and capital expenditure.
Balancing income with expenses
Then comes the difficult part of balancing the expenses against your income. If you are not servicing a big-ticket home loan, your expenses should not be more than 70% of your income. This is important because at least 25-30% of your income should go into savings, with at least 10% out of this earmarked for retirement. No doubt, maintaining this savings rate may demand a few tough measures. Young consumers find it difficult to cut down on lifestyle expenses. But if sacrifices are not made at this point, they may have to make bigger compromises later in life.
    The budget will help you trim expenses to the desired level. Expenses are broadly divided into necessities and discretionary spending. There's not much elbow room when it comes to necessities such as food, clothing, housing, education and healthcare. The most one can do is pick up clothes during off-season sales or buy home brands of groceries. But there is plenty of scope in another necessity: insurance. The cost of insurance cover, including life, health and asset insurance, should ideally be 5-6% of your total income. This means a household with a monthly income of Rs 1 lakh should be spending about Rs 60,000-72,000 a year on insurance. If you are paying more, you have the wrong type of plan. Just as the government abolishes schemes that don't meet their objectives and are a drain on
resources, you need to weed out such plans from your portfolio. One of Maalde's clients was paying Rs 4 lakh premium in a year, which was almost 20% of his total income. "We advised him to surrender some of the high-cost plans because they impinged on his ability to save and spend," says Maalde.
Track and control expenses
A traditional way to control household expenses is to use envelopes for different heads. Write the name of each expense on the envelope and put the budgeted amount in it. When you have to make a payment, take the money from the appropriate envelope. This might not apply to all the heads but can include at least certain small expenses that go unnoticed. When the money allocated to a certain head is finished, don't spend anymore till next month.
    There are also various money management software to track your income and monthly expenses. These software integrate the individual's finances, telling him exactly how much he has in his bank account, when an EMI is due, how much is his tax and where his money is going.
When spending exceeds income
If you spend more than you earn, you could be headed for trouble. But there are exceptions to this rule. After all, isn't the government resorting to deficit financing and filling up the gap by borrowing? You do the same when you take a loan. However, financial prudence is crucial here. It's a good idea to leverage the future income to build an asset, such as real estate. Borrowing for a new set of wheels when your car is in good condition or zipping off on an overseas holiday is not.
    Planners says that your debt repayment should not exceed more than 40% of your total income. This is why lenders peek into your bank account to see how many EMIs you are servicing before extending a loan. It's okay if your EMIs are up to 50% of the income if they include one for a home loan.
How are consumers coping
Rising inflation has sent many household budgets awry in the past few months. According to the Emerging Consumer Survey conducted by Credit Suisse in 2011, the rise in prices has dampened consumer sentiment in India and nudged people to focus on essential items. Another global survey by Nielsen identifies the areas where Indian consumers are planning to cut corners this year (see table). Most of these are discretionary expenses, but some essential costs can also be pruned by simple changes in habits. For instance, you can bring down your power bill by switching to compact fluorescent lamps and other energy efficient gadgets. Over time, this can translate into huge savings.
    In the end, a budget is only a document of intent. Its success lies in the way it is implemented by those who have prepared it. If they don't keep to the desired level of expenditure, governments often miss their targets. Make sure you don't miss yours.

Gaurav Tayal, 28 years | Mumbai
His budget: Tayal earns 50,000 a month and spends roughly 50% on essentials, such as rent, food, clothing, healthcare and insurance. Only 5% goes to entertainment, while the remaining 40% is invested.
Our assessment: He has maintained a high savings rate, which will prove helpful when he becomes a parent and essential expenses shoot up.

Bhavesh and Sonia Kumar, 44 and 38 years | Delhi
Their budget: The Kumars earn Rs 1.3 lakh a month and spends roughly 60% under essential heads. Almost 40% of the income goes into their savings every month. The education expenses of their teenaged sons will increase in the coming years but the couple has planned for that.
Our assessment: Their savings rate is healthy and will help them reach their goals. They must start budgeting their expenses.