It’s a fact that the boring old home budget is the cornerstone of a robust Financial Plan. A well-planned home budget ensures that you don’t overspend and overleverage, and that you’ve got enough dough left over every month to put away for your family’s future. Here are five things to consider while preparing a home budget.
Go granular
Just the way that small leaks can sink a mighty ship, small expenses can throw your home budget into disarray. Think that bi-weekly trip to Starbucks isn’t worth accounting for? You’re wrong – it may just be costing you Rs 3000 per month! When you’re preparing a home budget, make sure you go into detail and leave nothing out, however small or insignificant it may seem prima facie. Consider things like the snacks you buy on the way to work, money spent on a routine basis for home-maintenance, and the like.
Consider the non-monthly recurring expenses
Apart from your monthly spends, don’t forget to account for the larger, nonrecurring expenses too. Examples are: your water bill (which may unexpectedly land up once after 8 months, and set you back anything from 8000 to 10000!), your life insurance and medical insurance premiums, your vehicle servicing expenses, Diwali gifting expenses, and the like. Divide the annual sum total of these expenses by twelve, and provision for them by saving this money via a Mutual Fund SIP into a liquid fund.
Follow the “Coffee Can” approach for dealing with unexpected outflows
Life is all about unexpected events, and these events often set you back, financially speaking. Things like medical costs that are not covered by health insurance, or for that matter – a music concert that you just cannot miss – can potentially disrupt your monthly budget. If and when that happens, its best to follow the tried and tested ‘coffee can’ system that our grandparents did – that is, provision for large, unexpected expenses by reducing spends from a few other heads (such as discretionary spends like eating out or shopping) to compensate for these outflows.
Apply the 10% rule
Remember – try as you might, you’ll never get your monthly budget just right. Which is why you need to apply the 10% rule and inflate the final monthly expense number that you arrive at by 10%. Assign this number to the ‘miscellaneous expenses’ head, as they are bound to come up. Some month, your A/C may break down, another month may see your car requiring maintenance. Another month may see a cluster of wedding that require spends on gifting! By inflating your budgeted spends by 10%, you’ll be creating a much-needed buffer to provision for these unexpected expenditures.
Prioritise
Once you’ve drawn up your budget sheet, separate your expenses into ‘needs’ and ‘wants’ and assign a priority to each item within both segments. In doing so, you’ll have a clear contingency action plan to deal with very real but unfortunate situations such as a temporary job loss or a business initiative failing. Make sure your significant other is clued into this prioritised action plan, and is ready to implement it if the situation calls for it. After all – implementing a budget is all about teamwork, and all your household members need to be equally committed to making it work!
