We hope you have given your expense, income & goals a thought, as discussed in our previous blog. If you are new here, you can read the past blog here.
Okay! Moving forward to today’s discussion. We will discuss how a budget plan can help you and dive deep into the top 4 budget plans that may work for you.
Estimated read time: 3 minutes and 45 seconds
Hint: Just like we each enjoy our coffee with different mixes of water, decoction, and milk. You have to experiment with various budget plans.
Buckle up, here we go!
How a budget plan can help:
Remember when your teacher told you to write a report on some boring topic for the first time? What was the first thing you did? You asked some of your classmates or seniors to share theirs so that you can get an idea of how and what a report is.
Well, a budget plan helps you the same way to manage your expense and savings. You don’t have to start everything from scratch. You get a template on how it should be and how to apply it.
For me, the 50/30/20 budget method worked well, and there are some more methods that may work for you better. Let’s dive deep into these methods, and you can select one plan that works for you or use a combination of them.
The Cash Envelope Method:
Are you someone who is not good with money? Do you spend it impulsively? Then this method can help you.
First, encash your salary as soon as you receive it. Based on your necessary requirements, add money to different envelopes for different uses. Separate envelope for rent, food, clothes, investments, etc.
This way, you would know how much money you have left. You can spend it on your wants – one-off expenses or increase your savings.
It’s easy to control your urge this way as science has proved it’s hard to spend cash. Once you develop excellent control, you can slowly move to online transactions.
The 50/30/20 Method:
This method is the most common one. It suggests that you need to allocate 50% of your post-tax income to meet necessities like rent, food, etc.
Allocate 30% for your wants. This can be a new mobile or a vacation. If the amount is high, try saving up for a few months, then spend it. But don’t change your allocation ratio.
The last 20% goes for your saving & investments. I would recommend allotting this 20% before the other two components. Form a discipline to invest this amount regularly every month. Create SIP (Systematic investment plan) to invest every month. We will discuss more on this later.
Remember, the ratio mentioned above just provides a general idea. You can change the ratio based on your goals, but consistency is essential.
The goal is to allocate your income even before you spend it.
Each month, you list down all your expenses and add them up. You allocate them and save or invest the rest. The aim is to put all your money to work, whether as an expense or investment. And, start fresh next month.
You need to be very detailed while listing down your expenses so that you know what are you spending. You can use expense tracking apps to help you.
Net Worth Method:
This method is for people who can meet their necessities easily. And, for people who like to look at the bigger picture.
To start, calculate your net worth by adding all your assets – investments and subtracting your liabilities – loans. This shows you the bigger picture, whether your net worth is positive or negative. It is okay if it’s negative for now. The goal is to make your net worth positive and keep growing your wealth.
Awareness is the greatest agent for changeEckhart Tolle
If your net worth is positive and growing at a healthy rate, you don’t need to bother yourself with small expenses here and there. Relax and keep the good work going.
Budget plan for Indian Families:
Most of the budget methods are developed by experts in the US, UK or Europe based on the data available. In India, we have a different lifestyle. Our finance is more interconnected with our family than theirs. So, are these methods suitable for our needs?
Yes, you can apply these methods to plan a budget for your family, with some adjustments. Some of you might find it hard to explain these methods to your parents. But, there are too many positives here to not try it once. Who knows, you might discover a hidden investment that is losing you money.
While planning a budget for a family, it is important to start with the net worth method. This will help you understand your situation better. It is always better to know about insurance, assets and liability your whole family holds before it’s late.
This step is crucial for your investment portfolio planning as well. You wouldn’t want your family to be overexposed to a particular asset like real estate, gold, stock, etc. Diversification is important. So try to understand your family’s overall exposure.
After realising where your family stands, you can use the zero-based or 50/30/20 method to plan a budget. Remember to focus on your family’s goals as a whole and the goals of individuals as well.
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