Runaway inflation has taken a huge toll on the personal finances of the common man. The rising prices of essential commodities along with an economic slowdown and a correction in financial markets have made it all the more difficult for individuals to manage their expenses.

In such a situation, a budgeting and investment planning is a must to help one manage one’s resources.

Budgeting expenses

People spend their income broadly under three heads: Regular consumption and lifestyle expenses, loan installments with principal repayment, and investment allocation towards various financial goals such as housing, retirement, children’s education and marriage.

Let us look at these categories in detail and see how one can optimally manage these expenses.

Regular consumption and lifestyle expenses: This category has the biggest scope for improvement. While one has to spend a fixed amount on regular expenses, a lot can be saved on lifestyle expenses, especially purchases made on impulse purchases such as latest electronic gadgets, clothes, eating out and partying.

Loan instalments with principal repayment: One should make it a point not only to service interests on loans but also repay the principal in time to be debt-free much before retirement.

One should avoid getting into debt traps on high-cost loans such as credit cards, which charge an interest of 36-40 per cent per annum and allows a person to roll over the amount due along with accrued interest, upon payment of only a small minimum balance.

Investments: The allocation for investments should not be ad-hoc, depending on how much money is left after all other expenses. If one follows this method, one will hardly ever find any surplus for investments.

Rather, people should plan their goals ahead of time and set monthly investment targets for each goal, within their affordability. Thereafter, they can proceed to allocate their income towards these investments and the remainder can go towards expenses.

All this sounds good, but may seem difficult to follow. Here are a few tips to help you plan a proper budget planning.

• Frankly discuss with all the members of your family your income and needs, including any major expenses that you have planned for the future. This will help you take everybody into confidence while planning your resources.

• Jot down all the expenses or investments you make on a monthly basis. The expenses made at regular intervals, say quarterly or annually, such as insurance premiums and taxes, should also be noted and divided by the number of months within that period to convert all of them into monthly figures. This will give a correct picture of your monthly commitments.

• Create a budget worksheet for yourself, which will have two sections. The first will have your income from all sources, excluding the taxes.

The other section will contain all your expenses under various heads such as household costs, car, travelling, education etc. You can add as many suitable sub-heads according to your convenience. The idea is to make the worksheet detailed but not cumbersome.

• Go through each expense head after you have inserted the figures. This will help you judge where you can cut costs without annoying any family member or stressing yourself out!

Simple things such as joining a carpool to work or school, purchasing household goods in bulk for the month can help save a lot.

• Next try to arrive at an acceptable monthly budgeted expense under each head, which should be practical and can be achieved.

• After this, if there is a surplus income over expenditure, you are in the comfort zone and are well budgeted. However, if there is a shortfall, you are spending beyond your means and need to improve upon your spending pattern.

• However, don’t panic if you have not spent within your budget in the initial period or in times of some emergency.

Try to find out the reasons for overspending and get back on track immediately.

If the habit of overspending continues, the whole process of budgeting could turn futile.

Create a contingency fund for such emergencies, where you keep at least six months’ expenses in a liquid fund or a bank fixed deposit with overdraft facilities.

• Maintain a separate expense account, which will receive an amount equal to the budgeted expense for the month from your salary account.

This will help you spend within your budget. In case you see a surplus in the account, it would be because of expenses that do not arise monthly.

Don’t spend this! Rather, park these funds in a short-term investment, like a debt fund and redeem to pay when due.

• Make all expenses in cash and make a note of them, or by debit card, so that you can track them immediately.

One often loses track of post-dated cheques and credit card payments, which can make future budgets go awry, as and when they become due for repayment.

• While it is possible that you will overshoot your budget for the initial few months, if you follow these simple tips on budgeting, you will be in a better position to manage your expenses. All you need is determination and fiscal prudence.

Once you make budgeting a habit, it will grow upon you and will not just remain limited to expenses, but rather you will use its surplus in investments to realise your goals as well for debt management and reduction.

As the saying goes, there is no gain without some pain.

The writer is a certified financial planner and can be contacted at rishi@touchstonewealth.com