Have you ever created a budget or have you ever track downed
your expenses. If not you need to, 90% millennial's won’t keep the track of
inflow and outflow of money. I highly suggest you to have budget plan. I will
discuss her what is budget plan and basic thumb rule of budgeting.
Time magazine as one of the 100 Most Influential People in the
World—coined the "50/30/20 rule.
Here I am going to make a little change to this 50/30/20
rule and will be explaining 50/20/20/10 rule.
Step One: Calculate
Your After-Tax Income.
Your after-tax income is what remains of your pay check
after taxes are taken out, such as state tax, income tax, and professional tax.
And take out your PF contribution as well. If you're an employee with a steady
pay check, your after-tax income should be easy to figure out.
Step two: Limit Your
Needs to 50 Percent of Your After-Tax Income.
Now coming back to budget. How much do you spend on needs
each month things like groceries, housing, utilities, Life insurance, EMI’s.
According to the basic thumb rule of budgeting, the amount you are spend on
these things should total not more than 50% of your inflow.
Of course by this time you must differentiate between which
are NEEDS and which are WANTS. Basically, any payment that you can forgo with
only minor inconveniences such as your cable bill or dining out is a want. Any
payment that would impact your quality of life, such as electricity and prescription
medicines, is a need.
Step three: Limit
your WANTs to 20%.
Sounds perfect on surface. But can you actually put 20
percent to your WANTs? Hey, trip to GOA, salon haircut, and Italian
restaurants.
Not so fast. Remember how strict you are with the definition
of NEED? Your WANTs don't include extravagances. They include the basic
niceties of life that you enjoy, like that unlimited mobile tariff plan, happy
hours etc...
You might spend more on WANTs than you think. A threadbare
minimum of warm clothing is a need. Anything beyond that, such as shopping for
clothes at the mall rather than at a discount outlet, qualifies as a want.
Yes, the rules are tricky, but if you think about it, they
make sense.
Step four: 20% on
savings and debt repayment.
You should spend at least 20 percent of your after-tax
income repaying debts and saving money in your emergency fund and your
retirement accounts. If you carry a credit card balance, the minimum payment is
a NEED and it counts toward the 50 percent. Anything extra is an additional
debt repayment, which goes toward this 20 percent category. If you carry a
house loan or a car loan, the minimum payment is a NEED and any extra payments
count toward "savings and debt repayment."
Step five: 10%
investing.
Do you remember the word of Warner buffet, LET THE MONEY
WORK FOR YOU (will explain in coming posts in detail). You need to invest you
ten percent of your income for a long term (like stocks, mutual funds) and for
multiplying your money by the power of compounding.
An Example of the
50/20/20/10 Plan
Let's say your total take-home pay each month is ₹35,000.
Using the 50-20-20-10 rule, you can spend no more than ₹17,500 on your needs
per month. You probably can't afford a ₹15,000-a-month rent or loan EMI
payment, at least not unless your utilities, car payment, minimum credit card
payments, insurance premiums, and other necessities of life don't exceed ₹2500
a month.
If you already own your home or car, you're pretty much
stuck with that ₹15,000 payment. Consider changing job/ make other source of
income that make your budget more manageable or take a look at your other
"needs" to see if there's a way that you can reduce any of them.
Maybe shop for more affordable insurance or transfer the balance on that credit
card to one with a lower interest rate so your minimum payment drops a bit.
You can spend ₹7000 a month on your WANTs based on that
₹35000 you're bringing home each month. You might consider doing without a few
things and shifting some of this money to your NEEDs column if you're coming up
short there—not necessarily indefinitely but until you can get your needs down
to a more manageable level.
Remember, you still need 10 percent left over so you can
invest according to the 50/20/20/10 plan. Now you have ₹3000 left, that last 10 percent. You know what
to do with it. Invest and plan for your future.
