Budget- First step to financial freedom!!

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The word “Budget” may give the impression of restricting one from spending money freely, instead one should take it as their first step towards financial freedom. We generally assume that it is not important to have a budget especially if our daily household expenses fit easily into our large incomes. People with larger cash inflows believe it is only required when planning a journey or starting up a business. However a right attitude towards budgeting will help to lead a financially free future. We at Fpguru.com will help you draw attention towards the significance of budgeting and the important aspects to be kept in mind while planning your everyday budget.

 

 

Income

Firstly it is important to jot down all your sources of income to know the exact earnings received every month. It is easy for a salaried person as they receive regular income per month from their employer. However for a self employed or a business man it gets difficult because their incomes are irregular and might be received on a quarterly or semi-annually basis. Their profits can also be different for each financial year. Thus for them, it is advisable to maintain a flexi-deposit account or a contingency fund to receive atleast a year’s expense to run the house during any financial problems in business or loss of income. A person can have more than one source of income however it is very important not to consider your one time income or windfall, for example sale of property, shares etc, as such  income received is only an asset or capital income and shall not happen every month. One time income can however be kept in a contingency fund to be used during any loss of income or facing any financial deficit in the daily budget. The income to record should thus be recurring in nature.

Expenses

One should jot down all kind of outflows made on regular basis to know exact expenses made every month. These expenses should be put down depending on their priority basis so that one gets a clear picture on where our income is going. Some expenses are essential & cannot be compromised in any situation. These include food, rent, utilities, child’s education expenses, clothes, insurance premiums etc.  EMI’s are also expenses you cannot compromise upon. This is one expense which has to be paid & that too on a pre-determined date without delay. Thus you should ensure EMI’s don’t constitute a big chunk of your inflows. Ideally they should not cross 35% of your income.


Some expenses are of less priority but are also a part of most households. These are entertainment, dining, lifestyle shopping, vacations, etc. These can be compromised to some extent. In extreme situations when inflow falls, you may need to eliminate them completely for some time. These expenses are the one’s which can mess up with your household budget if not kept under control.


After jotting down all kinds of income and expenses one knows exactly where they stand and get a better picture of their standard of living. If there is any kind of surplus left one should start investing towards any financial goals. Most of the times the SIP’s made are considered as expenditure. This is not correct! SIP’s are investments but part of your surplus, these SIP’s give you returns after a period of time. Higher the investments higher will be your wealth in a long run. When making a budget it is very necessary to have some kind of savings. Thus it is equally important to manage your budget in such a manner so that one has good surplus to make investments and fulfill their financial goals over a period of time. It is not only important to run the house economically but also simultaneously takes steps to achieve one’s future goals, only then one can live a financially stress free life.


Something as simple as having a households budget will help you see a clear picture of your finances and equally help you make investments to achieve your future goals. You will become more conscious about your purchases. This is a process where both husband as well as the wife should take part. In the Indian scenario, the husband is the bread earner and the wife takes care of the expenses, hence it is important for both to sit down together and make their house budget. This process cannot be done by only one person & both need to contribute to improve the quality of their everyday life. So do start budgeting from today!

 

By Namrata Shah.

The writer is working with FpGuru.com as a Financial planner.


Comments  

 
0 #3 prat s k 2011-11-22 12:04
well written. hopefully i can chalk out a budget and stick to it.
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0 #2 Darshan 2011-11-09 13:44
this article has opened my eyes. will definitely work on the same with my wife and keep the above mentioned thngs in mind
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0 #1 aarti 2011-11-09 13:37
importance of budget is written very clearly and in a simple manner.
thank you
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