5 Steps for Financial Budget Planning
Planning the yearly budget might sound like a tiring and troublesome job. Often, one needs to redo it multiple times until things fall in place and satisfaction is achieved. Find below some help.
This article describes the plan to be followed on a monthly basis. However, for variable amounts of income at variable times, the steps can be modified accordingly.
Here is how this tedious task of budget planning can be broken down into 5 simpler ones and give the correct output:
Tracking the monthly expenditure:
The first step includes the calculation of the fixed monthly expenses. This list should cover the amount associated with all the needs which are unavoidable and are an inseparable part of the lifestyle. From groceries to milk, from bills to monthly subscriptions, from the payment of newspaper vendor to that of the maid- this list should include all.
The next step is to sum them all up.10–20% additional amount of expenses can be added too. This is the amount labeled as “fixed monthly expenditure”.
Emergency fund for next 10 months:
Next step is to ensure saving up for emergency times. Earlier, the time frame recommended used to be for 6 months; however, the global pandemic has taught us great lessons and has forced us to bring certain changes in our actions as well as thoughts. With job insecurities and sinking economy, it is better to have the time frame extended to 10 months. Yes, this is the new normal. If the recommended amount is already available handy, one can save for unforeseen medical emergencies and natural calamities.
Planning the tax saving schemes:
The next step is to plan the tax-saving strategies. As citizens, we all need to pay taxes; however, the government provides us with certain options that can help in the reduction of taxable amounts. These options can include, for instance tax saving mutual funds and loans. It is extremely important that one ensures to take advantage of such schemes and reduce the taxable amount as much as possible.
Categorizing the goals:
At the end of the day, savings are done to fulfill our needs and wants. If not today, the goals will develop in the near future. However, in both the scenarios, it is advised to segregate some amount for two types of goals: long term and short term.
Short term goals are those that need to be met within the span of next 5 years. For instance, buying home appliances or electronic gadgets, travel plans etc.
Long term goals have a longer span and can range from 10–40 years. These can include buying a house, child education and even retirement.
Depending upon the availability of resources and the constraint of time, one needs to decide upon the amount to be allocated for short term and long term goals.
Here is the final step-last but not the least. After setting aside the amount for expenditure, emergency fund, tax saving schemes, short term goals and long term goals, the remaining amount is what results in building and multiplying the money. Since the money required for the needs and to fulfill the wants is already set aside, now is the time for investment.
It is perfectly alright if this amount turns out to be pretty small but it is essential to leave some for this step too. The amount for investment will grow with time as and when the income grows. This is because the amount dedicated for the above steps remains constant (of course, few exceptions are always there) but the incoming amount keeps increasing. So, with time one can invest more and then the treasure continues to grow up to retirement.
These can include safer options like fixed deposits, recurring deposits, corporate bonds, debt funds, index funds or sovereign gold bonds which offer low returns but offer zero or very little risk; otherwise options like multicap funds, stock market which have high returns at higher risks. One can even consider including both and opt in for a diverse portfolio.
These 5 steps essentially cover all the steps required to develop a good budget plan. Once done, sticking to it and following it religiously is of utmost importance.