Word ‘ DINK ‘ has become very famous in 21st century urban India. This defines ‘Double Income No Kids’ generation. Generation of people born just before India started it’s economic liberalization process in 1991. These are young just married couple, aspirational, living in modern India, spending weekend at swanky shopping malls, using latest gadgets, driving a four wheeler and may be planning to buy a house, which their previous generation would have never thought of so early in their life. This is surely encouraging and gives a strong foundation to domestic consumption based India growth story, but there is other side of this aspect which is mostly ignored : And that is keeping check on spending and start investing early in life.
Most common phenomenon is living or relying too much on credit and finding it really difficult to set aside even a small amount of money for investment at the end of the month because monthly commitments towards EMI for car, home and even the latest smartphone or LED TV take majority part of monthly income. Ever wondered how our parents with only one earning member in the family and mostly larger family size, used to manage all expenses with limited and fixed source of income. Surely inflation has taken its toll and prices have gone up but so has our income level. Today, all luxuries have become necessities and stressful professional life requires higher spending on discretionary spending. What is missing in this generation is the practice to prepare and follow a strict budget.
Sir Benjamin Franklin has said, “ A Penny Saved Is A Penny Earned” and exercise of penny saving starts with a properly defined budget. Budgeting is nothing but to list down all your expenses and source of income on a monthly basis and write it down on a piece of paper or in excel sheet.
| Lets look at the typical sample budget of an Indian middle class family: | ||
| Sample Budget | ||
| Amount in Rupees | ||
| Particular | Monthly | Yearly |
| Income: | ||
| Salary | 60000 | 720000 |
| Rent | Nil | Nil |
| Interest/Dividend | 3000 | 36000 |
| Other Source | Nil | Nil |
| Total Income | 63000 | 756000 |
| Fixed Expenses: | ||
| Home Loan EMI | 20000 | 240000 |
| Car EMI | 4000 | 48000 |
| Maintenance | 1500 | 18000 |
| Insurance Premium | 2500 | 30000 |
| Housemaid/Cook Salary | 2000 | 24000 |
| School Fees | 2000 | 24000 |
| Any Other | Nil | Nil |
| Total Fixed Expense | 32000 | 384000 |
| Variable Expense: | ||
| Grocery | 20000 | 240000 |
| Electricity | 2000 | 24000 |
| Phone Bill | 1500 | 18000 |
| Conveyance Exp | 4000 | 48000 |
| Eating Out | 1500 | 18000 |
| Entertainment | 1500 | 18000 |
| Medical | 1000 | 12000 |
| Miscellaneous | 2000 | 24000 |
| Total Variable Exp | 33500 | 402000 |
| Total Expense | 65500 | 786000 |
| Saving/Deficit | -2500 | -30000 |
As can be seen from above sample budget, even after earning decent income of 63000 per month, this family is not able to save anything at the end of the month. In fact their total expense (both fixed and variable combined) crosses their monthly income and result in deficit of 2500 per month. This requires them to cut down on their variable expenses to bring their monthly budget in balance. List down your entire monthly income across various sources. Divide your monthly expenses in fixed and variable categories. There will be some fixed expenses like EMI payment, Insurance premium, kids school fees and variable expenses like grocery bills, utility bill payment, conveyance etc. There will be certain discretionary spending like eating out, movie, shopping etc. Clear listing down of income and expenses will help you in two ways: 1. To arrive at monthly surplus/deficit amount which you can set aside for investment and 2. Kind of expenses which you can avoid or expenses which need to be cut down. Initially when you start with, you will face problems as many items will be missed out. Therefore it is suggested to carry out this exercise on a monthly basis to make it a habit.
Income – Saving = Expenses :
Another method of inculcating savings habit is to estimate your monthly investment requirement first in consultation with your financial adviser to achieve basic goals in life like creating investment kitty for kids’ higher education, marriage, medical emergency and retirement. Invest this amount at the beginning of every month and leave only balance amount in your account for monthly expenses. It is easier said than done but slowly and gradually as you try to follow this, you will be able to put control on your expenses and start investing for your future betterment.
Preparing budget can broadly help you :
- To list down all your expenses and source of income under various heads.
- To analyze type of expenses and where to cut expenses if need be.
- To realise the exact amount of savings/deficit at the end of the month.
Prevention Is Better Than Cure:
Emergency can strike anyone at anytime. Don’t forget to create an emergency kitty. How much one should have as emergency fund is a topic in itself for discussion but if you are a salaried individual then funds equivalent to at least 6 months expense and for a businessman funds equivalent to at least 12 months expense should be saved as emergency funds. As you are not going to use this money unless an emergency strikes, you can put this money in liquid/money market funds to earn return better than your savings account.
Some Important Points to Consider:
Try to minimize usage of credit card If used, make sure to make full payment of credit card bill by due date to avoid any penalty/interest charges as late payment charges are on a very higher side in credit card bills. Do not fall into ‘Debt Trap’ Try to pay off unproductive, high interest bearing loans like personal loan, credit card bill and even car loan as these are the loans which are not used to create any asset. Always remember, no matter how small the amount of savings is, every amount saved and invested can multiply and add to your wealth due to compounding effect.
You may find budgeting boring to start with, but once it becomes a habit, this activity will bring immense benefits in the form of good savings and investments for your future goals. Take inspiration from our mothers who did a commendable job in budgeting and managing our family’s expenses. After all it is for you and your family’s financial betterment.