The power of money multiplies when its use is maximized. Money is not just to spend on present needs and wants nor is it to simply save.
With your money, you should be able to:
(i) meet your needs and monthly household expenses,
(ii) build a healthy saving to meet your future goals,
(iii) build a financial safety net to stabilize your financial present and future - deal with emergencies without a significant financial impact, and
(iv) set aside money to grow through investments
How do you find money for everything? A. Trim the extras
Almost every household would have spending areas that can be cut or reduced. These areas often eat into probable savings. It would be easy to identify these trim-able spending areas, if you classify your expenses in 3 main groups;
1. Needs or essentials - bills you must pay to run your household
and to keep your family healthy and comfortable. Utilities (electricity, gas, water), housing-rent/home loan installments, groceries, health, transport, insurance, education, are your needs. Things that make your life simpler and more convenient can also be regarded as needs.
2. Wants - all other ‘nice to have’ expenses for entertainment,
travel/holidays, gifts, looking good, fun and celebrations, etc 3. Wastes - excessive tea/coffee, cigarettes, alcohol, gambling, spending on wants beyond your means. Wastes eat a major chunk of your money bit by bit at a time.
Spending Mantra - spend on needs first, wants later and waste
Categories of expenses
Individual Expenses—Description Is it a Need/Want/Waste?
1. E.g. Haircut Need
2. E.g. Cigarette Packets Waste
3. 4. 5. 6.
Other Expenses—description Is it a need /want/ waste? 1.
2. 3.
W
orksheet 1.7
Step 6 – Budgeting! Trim the extras!
Enlist in the space given below, all the expenses that make the ‘Individual Expenses’ and ‘Other Expenses’ in Worksheet 1.3. Ask yourself whether each of the expense in the list is a need, want or a waste. Refer to the text on previous page for details. And write down this category in the adjoining column.
In future expenditures eliminate the items that you have classified as wastes and start trimming the wants. You will soon see that your expenses would reduce and monthly balance and saving would improve.
How do you find money for everything? A. Trim the extras B. Allocate
Allocation of your earning is an effective way to maximize the use of your money. Allocation, an important part of budgeting, means to plan before hand how you can find money from your income to spend, save, stabilize and invest.
Allocation guidelines
To begin with, you could use the following guideline to allocate your income. Later as you follow the process consistently, you would figure out the allocation formula that works best for you and your family. Your average justified past spending that you would have figured out from your accounts could be your basis to allocate.
Category Allocation (i) Spending 50% of income (ii) Savings towards goals 20% of income (iii) Stabilizing finances 20% of income (iv) Investing (long-term saving) 10% of income
Envelope Budgeting
Envelope budgeting is a simple, easy- to-follow method of budgeting. In this system, on a regular basis (i.e., monthly, weekly) a certain amount of money is set aside (allocated) for a specific purpose or category, in an envelope marked for that purpose. Envelope budgeting is an ideal method for beginners to start budgeting and also for those who have problems sticking to a budget.
The process of envelope budgeting is listed below in a step-by-step manner. Note that a general process is mentioned below for transactions in cash. You can use the same process using digital/electronic worksheets to suit your needs and modes of payments—by cheques or electronic transactions.
(Use the following checklist to make and follow a personalized budget. Check each box alongside the step by placing a tick mark in it once you perform the step.)
1. Make budget calculations on a paper
(Use your expense records—Worksheets 1.3 and 1.7 and the allocation guidelines mentioned on the previous page.)
2. Deposit the amount you would be saving in your savings account. (Do not forget to update your passbook/register with the recent balance.)
3. Make payments towards stabilizing finances on the due dates —insurance premiums, an emergency account, debt repayment etc.
4. Put the portion you have allocated for investing in an identified instrument or store it separately in an envelope for investing later, when you have enough funds.
5. Identify your various expense groups and make one envelope for each.
(Housing (rent/loan), utilities, health care, food and grocery, transportation, clothing, home furnishings, personal care, individual allowances, recreation, gifts/social occasions, interest charges and fees, salaries of maids/workers)
6. Mark the envelopes using words or pictures to represent the individual expense groups. 7. Divide your cash according to your budget calculations.
8. Place the allocated cash in respective envelopes of the spending groups
9. Maintain a record of all the transactions mentioned in this process in a register or an account book. 10. At the time of paying a bill or buying, withdraw money from the envelope marked for that purpose. 11. At the time of shopping, especially for wants, see if there is sufficient cash in that envelope to make the purchase. If there is, go ahead, make the purchase. Otherwise do not make the purchase, at least not until the next allocation is made and the envelope marked for that has enough money to make the purchase. This becomes an automatic regular control. On the other hand, if you do not spend everything in the envelope in a cycle, then the next allocation adds to what is already there resulting in more money for the next cycle.
12. Follow the same process of allocation and use of your earnings every month. Keep updating your accounts.