Budgeting lessons from the Budget

The way the government handles or mishandles its Budget has lessons for all of us in managing our budgets     Budget is the current obsession. There was a time in the 1980s when the government used to tweak things sector by sector, leaving everyone glued to stock prices and sector calls. Then we had the reformist budgets of the 1990s, when the government began to focus on the macro aspects. Also, a large number of reforms happened outside the budget speech. In the current decade we seem a bit lost, neither able to do reforms nor tweaking micro aspects.      This seems to have trickled down as many of us do not make household budgets any more. But this does not mean we do not have to take any strategic view of our incomes and expenses. We need at least an intuitive sense and some control, in the interest of our wealth. What are the lessons for the household budget this season?      The government's budget is driven by the expense side. The household budget has to be driven by income, and we can't spend what we have not earned. At all times, we need a strategic focus on our future income and how well we have secured it. The Indian government's budget is weak because it makes too little investments to secure the future for all of us. Without economic growth, there is no job growth. When the government fails to generate future jobs, the onus on us to secure our future income by our own actions is even higher.      The government's expenses are populist in nature, with an eye on the vote bank. How the government spends the money is not driven by the long-term needs of the economy, but by a predominantly socialistic view of how to alleviate poverty and backwardness among a large section of the population. We all know of the leakages in reaching these funds to the really needy. A large portion of the money is also spent in paying for the essentials, including running the government, paying the salaries, interest on borrowings and such mandatory items. Too little is then left for building roads, hospitals, schools and other infrastructure that will help a large number of people to find jobs and a secure future.      A household budget may also become irresponsible if it focuses too much on expenses that do not build assets. It contains mandatory expenses that are inevitable like rent, transport and food. Then there are expenses on education and health, which have long-term benefits. Then come expenses that do not create assets, such as entertainment and luxury. Even if a daily account is not maintained, a household should know what percentage of income goes under these three heads. A poor household has inadequate income that barely covers the essentials. A very rich household has adequate income to indulge in luxuries. A middle class household tries to balance the three ends carefully, moving between stress and comfort from time to time. The strategic view should include insurance that covers the mandatory expenses at least, adequate future income to cover expenses after allowing for inflation, and sensible cut back of wasteful expenses to create a buffer.      A government can afford to run a deficit. It can print money, increase taxes, or borrow internationally, or even be bailed out. When a government spends more than it earns, it is still a bad decision, unless the current expense enables a higher future income. For example, running a deficit to fund infrastructure building is alright, since it will bring future benefits. But running a deficit to pay interest and salaries is bad. A household cannot run a deficit and remain healthy. Unless there is immense confidence about future income, it is a bad idea. Large loans for homes, cars, personal expenses, and unpaid credit card balances are all charges on the income, current and future. Since they have taken a loan, the charge on the future income will include interest as well.      A household's problem simply stated is as follows: Future income is subject to risks in the employment, skills and entrepreneurial markets. Expenses it has to incur are subject to increases from inflation and lifestyle changes. Therefore, the only strategic option when one is looking at a balance sheet with risks is to create a reserve. This is why a household that does not save is simply foolish. It exposes itself to the uncertain future with very little preparedness. Deficit is bad for the government and disastrous for the household.      The government's budget receives wide-ranging criticism and is subject to  analysis about what was allocated where and why. The household budget is not subject to such scrutiny. It is secretive, seldom involves all members of the household, and is mostly not documented. It need not be publicised. But it could do with scrutiny and strategic direction from an external, dispassionate professional. Financial planning is not merely investment advisory that will tell you what is the asset allocation that helps your financial goals. It is about taking charge of your personal finances, in your best interest. It is time personal finance audit is available to households, where professionals study the income and expenses, liabilities and assets, and lay out before the household its strategic options. Instead of worrying about the macro picture of the government budget, perhaps some of us can go micro this season?