How do you prepare a spending plan.
Before you can prepare a spending plan, it is important to understand the difference between wants and needs.
Family’s Financial Needs: These are the essential expenses that allow all family members to live their lives. These expenses include recurring expenses like food, housing and clothing, transport, children’s education, insurance premium repayment, loan repayment, medical costs, gas and electric bills, and water charges.
Wants –Wants refers to expenses that allow us to live more comfortably. These include entertainment, dining out, shopping, designer clothes and accessories, expensive gadgets, hobbies, and travel.
All expenses should be listed under these headings. Your goal should be to spend money on your needs before fulfilling your desires. Needs and wants should also be prioritised based on the short/medium/long-term view. This will help you save money and make financial planning simple.
What factors should you keep in mind when creating a monthly budget?
A budget can help you plan your spending and reduce overspending.
- Your income is the first thing to consider when preparing a monthly Budget. The net income includes income from rental income, salary, and income from financial instruments like interest, dividend, etc.
- Next is spending. You can get a clear picture of your monthly expenses by making a list with all your needs and wants and the cost. To get a clear picture, include even the smallest purchases that you plan to make.
- After you have prepared the income and expense statements, calculate the balance between income and expenditures. If you see more expenses than income in your monthly budget, it is a sign that your financial situation may be in trouble. This could mean that you need to cut your expenses or find new ways to make money. In order to save some money, your expenditures must be lower than your income. It is possible to borrow if your expenditures exceed your income.
- When preparing your budget, you should consider allocating a portion of your income to meet certain financial goals. This could be for the short, medium, or long-term. Take a look at your future goals to determine how much you should allocate. You should keep track of your progress toward achieving these goals. After a year, you might be able to save enough money to purchase a car.
How can one divide income between saving and spending?
It is a common observation that we spend the most money on our monthly expenses first, and then save any extra for savings. This is an incorrect way to manage money. It is better to save a portion of your income before you spend it. Income – savings = expenses Find out what you need to save in order to achieve your financial goals. Adjust for inflation. You should allocate the most to your financial goals and then manage your household or other monthly expenses using what you have.
The 50-20-30 rule is the general guideline for how to divide monthly income between saving and spending. This means that 50% should be used to meet your immediate needs and 20% for short- and long-term savings. 30% should go towards satisfying your desires.
How much income should one save for different ages?
Your financial goals, financial status, and age all play a role in the percentage of income you should save. A 25-year-old youngster can save 10% of his income at the beginning of his career. He can save up to 15% as his income grows. They can save a minimum 20% of their net income, and slowly increase savings until they reach 40%.
How do you allocate income to the main budget items
Cost of living changes depending on where we live. Spending also varies depending upon who you are. If we take a household income of Rs 1. lakh per month as an example, the allocations should:
- Rent: 20% (Rs 20,000)
- Food: 18% (Rs 18,000)
- Household operations: 4% (Rs. 4,000)
- Transport: 4% (Rs 4,000)
- Education: 5% (Rs 5,000)
- Medical expenses (including premiums for health insurance): 4% (Rs. 4,000).
- Clothing: 5% (Rs 5,000)
- Entertainment and Family Recreation 5% (Rs. 5,000)
- Repayment of loans (e.g. Housing loan: 15% (Rs 155,000)
- Savings: 20% (Rs 20,000). This money should be used to achieve financial goals.
How can you save money for education and the marriage costs of your children?
Prior to deciding on the option, set goals. You should estimate the amount needed to pay for education and cover marriage costs. When looking for investment tools, consider the following:
(i) It should provide high long-term returns to beat inflation;
(ii) It should also enforce financial discipline to ensure that the corpus you have set aside for your children is not used to cover any immediate expenses.
You should allocate a significant amount to equity-oriented instruments to cover children’s college expenses (expected to be at least 10 years away) and marriage expenses (15 years away). You can invest in equity-oriented-balanced mutual fund, ULIPs (unit linked insurance plans). You can invest in diversified Equity Mutual Funds to meet your marriage expenses. Some can be allocated to Gold ETFs (exchange traded funds) or a Gold Bond scheme. As the goal term approaches, it is a good idea to gradually shift from fixed income to equity.
How do you keep liquid funds available for emergency situations?
To meet unexpected or unplanned situations, an emergency fund should be equal to six times your monthly earnings. It should not be used for routine expenses. Instead of storing that money in a bank account you can put it in liquid funds, ultra-short term funds, or short-term regular deposits. This will ensure that you are able to access the money whenever you need it. You must ensure that the investment does not decrease in value and provides guaranteed returns. Also, you should ensure that there is no exit fee or pre-withdrawal penalty.
What are the pros and disadvantages of using credit cards?
A credit card is the same as a loan. Although the spending points schemes might look appealing, credit cards can make it easier to spend more. Credit card use is often a sign that you are living beyond what your means allow. You should keep track of the amount you spend on your credit card. If you don’t pay your credit card debt on time, it can lead to financial ruin.
What are the advantages of a home loan?
It can be hard to save enough money to purchase a house. A large capital investment is required for a house. A home loan can make it easier to purchase your dream home. It also allows you to repay it in simple EMIs. Because a tangible asset secures a home loan, it is considered a ‘good debt’. Home loans also have the following benefits:
- Long repayment terms for housing loans can be up to 30 year. This lowers your monthly cost.
- Home loans can be taken against your property and are called ‘secured loans’. These loans typically have lower interest rates than other types of loans.
- You can also take out a loan to purchase a house. This will allow you to benefit from the increase in property prices.
- Rent can be avoided by taking out a home loan and buying a house. It’s better to pay the EMIs rather than rent.
- A home loan has another major advantage: you are eligible for tax benefits when you repay the principal amount and the interest. Maximum principal repayment amount of Rs. 1.5 lakhs are eligible for deduction under Sec 80C. An annual interest component up to Rs. As a deduction from income under Sec 24, 2 lakhs may be claimed. Additional deductions of Rs. 1.5 lakhs to cover interest on home loans used for affordable homes up to Rs. 40 lakhs till March 2020
- Renting out a house can provide a second source of income. You can also claim the interest on the home loan, without any ceiling, against the rent you received for the house that was rented.
- The FY 2019-20 and beyond has seen the extension of the tax benefit to include two houses. However, the interest deduction for home loans will be Rs 2 lakhs for both properties.