K. ARAVIND
Everyone needs basic financial discipline. Those who want to create a budget and move forward must first consider their various sources of income.
Income includes salaries, bonuses, rent, interest on investments and dividends. After this the cost has to be calculated. This should include groceries, car fuel costs, and loan EMIs.
Compare your income and expenses after writing them down this way. If the expenditure exceeds the revenue, immediate steps should be taken to reduce it. Implement an ‘action plan’ to spend only according to the budget. There are some things to keep in mind to make sure you are spending only what you need and not spending too much.
Care should be taken to record all expenses. Expenses that do not occur every month should be divided on a monthly basis and the monthly expenses should be calculated as a whole. For example, expenses such as school tuition fees and insurance premiums paid quarterly or annually should be calculated on a monthly basis.
It is generally said that 50 per cent of the monthly income should be spent on basic necessities (food, shelter, clothing) and 30 per cent on other needs and then 20 per cent should be saved. But in modern families this ratio may not be followed.
The EMI of home loan borrowers is about 40-50 per cent. Therefore, it is not enough to set aside only 50 per cent for basic needs. In this case, the ratio has to be changed to 60:20:20. Still no change in saving 20 per cent.
Limiting certain expenses is important in financial planning. For example, the EMI of a home loan should not exceed 40 per cent of your monthly income. Similarly, the EMI of a car loan should be a maximum of 15 per cent. If the loan repayment consumes a large portion of the income, it will adversely affect your savings and investments for needs such as retirement and children’s education.
Life insurance premium should not exceed two-thirds of the annual income. A person with an annual income of Rs.5 lakh should spend only Rs.10,000-15,000 per year on life insurance. A term policy has to be taken to get the required coverage for such a small amount. High end coverage is not available for such a small amount through standard endowment plans. Therefore, avoid taking such policies. Ensure coverage by taking out a health insurance policy and term policy.
It is important to remember that excessive spending can lead to a decline in future income. Special care should be taken not to use the money set aside for investment for other purposes. Therefore, it is important to ensure that the amount of the deposit goes to the relevant accounts first. Care should be taken to regulate expenses with the amount after all these.
