Let us discuss the best ways to make Family Budgeting and issues faced by most of the salaried families along with possible solutions to overcome such situations.
Most of us will try to write down all our expenses and income in a dairy or use any mobile apps to ensure that we are not going to exceed our budget.
However, we still end up crossing the budget from time to time, mostly at least 4 to 5 times a year. Let us analyze why these things will happen and figure out possible reasons for such overspending /expenditure.
Why expenses always Exceed income /Budget- Possible reasons
- Our Income/salary is mostly fixed every month
- We don’t see any positive surprises in our life, additional income will not pour all of a sudden, very few instances like income tax returns, Bonus by the company, Lottery etc.
- We have too many negative surprises in our life, suddenly we may have to plan for a relative/friend’s marriage, or an unplanned vacation/trip etc.
- Most of the yearly expenses we don’t count while calculating our expenses like Car insurance, gym fees, festival expenses etc.
- Medical expenses, insurance expenses, so on and so forth.
- Many others as everyone may be having in their life.
- These will destroy all your long-term plans and goals
Due to the above sudden unplanned expenses hitting our pocket every month, we may end up having no cash at least 4 to 5 months in a year.
In many cases, these will cause distress to people running their families. Also, you will not be able to invest as planned in your long term goals. You will tend to break these thumb rules.
What are the possible solutions?
While there are many advisors bombard you with so many plans. I feel simple solutions mentioned below will suffice.
1. Have sufficient family Health Insurance and term insurance
- Look for your employer-provided health insurance cover, try to include add on as necessary
- Term insurance is a must for every earning member in the family, it comes with a very low premium and protects your family in case of any unfortunate event.
- This will reduce your cost of traditional insurance premiums, with more secure and highly protected sum.
- What’s more, these expenses are eligible for tax saving under Sec. 80.C too.
2. Have surplus cash for immediate negative surprises
- Like we discussed above, what if we have some surplus cash with us to overcome such sudden expenses.
- To counter such negative surprises and cash crunch during the month, you should have surplus cash with you.
- Keeping 20% of your monthly expenses as surplus will do. If your family income is say Rs. 1lac, keeping Rs.20k as surplus will be sufficient to overcome all such problems.
- This may not be an easy task, to have 20% as surplus, maybe you can start with 5% at first, later slowly you can add and make it 20% of the total.
- Once you have such amount, you need not worry or panic in such unplanned events.
- This will act as positive surplus cash available throughout.
- Next, try and avoid spending this as much as possible, but if spent, fill it up soon to keep this 20% always as surplus.
- You may keep this amount in any liquid fund to earn great return than your bank balance.
3. Build and keep Emergency fund/ cash
- This will be powerful money for you in case by any chance if you lose your job or if you got fired due to any reason or if your income stops suddenly.
- Building an emergency fund is a great idea, to keep you going till you find a new job/new avenue for income with peace of mind.
- We normally worry and panic during such situations, and take hurtful decisions.
- You need not worry about running your family expenses. this will take care of your expenses for 4 to 5 months.
We need not join low paying job or struck in lower income avenue due to pressure.
- This will ensure you keep all your assets keep going, you need not panic and sell your property at low evaluations or need not sell your stocks or equity mutual funds before reaching your goal.
- Ideally, you should build 4 to 5 months salary as an emergency fund. If your salary is 1lac /month, you should ideally have 4 to 5 lacs as emergency cash
- This will not happen overnight again, this may take minimum 4 to 5 years time to have this much amount with you as an emergency fund.
- Unlike surplus cash in the above point, don’t use this amount frequently, you may use it for any vacation or unavoidable emergency, if used, try and refill as soon as possible in next few months.
- Keep this money in any liquid or Debt mutual fund so that It earns for you.
With these simple action points in place, you feel more secured and confident to face any difficult situations in life. This will remove most of your financial worries. You can keep investing in the long term.
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Friends, I am presently having this plan and able to manage well. what is your view on this? Do we need to add any more.?
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