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How Should One Plan Their Budget

Budget planning is a tedious task that requires consideration of various elements so that at the end of every month, you are left with savings that can be invested to obtain optimum returns. Preparing a budget not only helps you keep a check on your expenditure but also in making conscious decisions about striking the correct balance between your income and expenditure.

Plan your Expenses according to the Income

First of all, you need to club the income of all the family members for preparing your household budget.

The household expenses can then be divided into the categories as mentioned below:

1. Fixed expenses

2. Variable expenses

3. Savings

Income-Expenses (Fixed Expenses + Variable Expenses) = Savings

Majority portion of a household budget are the fixed expenses. Fixed expenses are the recurring expenses that you have to meet every month. Household utilities, rent, insurance payments and loans are the major fixed expenses. Savings is important for planning vacations, tuition fees for children, investments, marriage expenses, retirement and for meeting some uncertain events. The variable expenses include expenses such as groceries, personal, and entertainment expenses.

Tracking of income and expenditure is important to ensure required savings. There are various mobile applications available that help in tracking your budget. Budget tracking helps to cut down the unnecessary expenditure to maximize savings. Investment of savings can increase your income in future.

 

Benefits of Planning an Optimized Budget

Dividing the expenditure into various categories gives clarity on where the money is spent. Savings can then be deployed to make diversified investments in categories like real estate, life insurance, mediclaims, equities, bonds, Exchange Traded Funds (ETFs), hedge funds, savings account, mutual funds and fixed deposits. Moreover, fixed deposit rates

Prior planning of income, expenses and savings helps in investment planning, reduction of expenses, creation of emergency fund and elimination of unnecessary spending. Budgeting ensures that your expenses do not outweigh your income and the pre-decided saving goals are attained.

The purpose of planning the budget is to evaluate the difference between the actual and budgeted figures and to take corrective actions as per the requirements. An informed household can monitor it’s spending effectively based on the analysis of deviations from the budget.

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