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How to plan your family budget
Gaurav Mashruwala
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April 09, 2007

Last month while conducting a workshop on financial planning for two different sets of audiences, I had a similar kind of experience.

The first experience was while teaching senior level bankers. This was immediately after the Union Budget. Members of the audience wanted to have a discussion about the Union Budget. Many of them knew about various complex budgetary statistics at the back of their mind. Some of them also discussed the impact of the Union Budget on their bank, branch and department's budget.

The second experience was while teaching management students of finance stream in a business school. Students were brilliant. They had analysed the profit and loss accounts and balance sheets of many companies. Their knowledge about important aspects of fundamental analysis was excellent.

The similarity among both the audiences was that an extremely small number of participants knew details of their own family finances. They were clueless about their own (family's) spending habits.

Similarly, students knew budgets and other complexities associated with a company's balance sheet. But when I asked them how much it cost for them to survive on planet earth, they did not have an answer.

Friends, while we dabble with the country's budget, our organisation's budget and also discuss the finances of listed companies, we should always keep in mind that the most important budget of our lives is our own family budget.

Difference between reality and what you think

Just make a quick guess. How much do you (and your spouse) spend every month on going out during weekends, or what is your yearly expense on mobile phone bills plus new handsets or on clothes and accessories? Having guessed it, try and match it with the actual number. Most probably your credit card statements will tell you the actual number.

When my firm signed on Ram Mehra, a middle-aged company executive as client, he had mentioned that he spends approximately Rs 2,000 every month on eating out. A reality check of his credit card statement revealed a different picture. On an average he was spending Rs 3,500 every month.

That is about Rs 42,000 a year from his post-tax income.

Remember, I am not suggesting that you should not spend. I am only suggesting, please be aware of where and how much you are spending.

Envelope budgeting

One of the biggest culprits for the above situation is our payment and receipt mechanism. Years ago, our grandmothers would receive cash from grandfathers every month to spend. All expenses were paid out of this cash.

Now we receive payments by cheque, cash and direct credits into our account and we spend by cash, cheque, credit card and direct debit -- there are multiple inflows and multiple outflows. Also, now we have both husband and wife earning as well as spending.

Our grandmothers used a system called 'envelope budgeting' to manage their household budgets.

They would keep envelopes for different expenses � groceries, utility bills, gifts, etc. Once the amount in one envelope got over, the budget for that particular category was exhausted until the next month. If there was an emergency and the envelope was empty, they would use the excess left over in another envelope.

Our grandmothers knew exactly what they spent and where they spent!

Many a time it has been observed that individuals suddenly get motivated to write their family budgets, after reading some article or listening to some speaker. However if you have not created and maintained a budget for years, do not plunge into it at one go. If you start in a rush, you will withdraw in a hush!

How to plan your family budget

To begin with, start noting down expenses in only one or two spending categories. The first step is to get into the habit of noting down the expenses within 24 hours of incurring them. For example, begin with writing down the amount spent on movie, coffee and dinner.

Over a period of time � say in about three to six months � start adding categories.

I may be getting repetitive here but the first year's efforts should be to get into the habit of noting down expenses within 24 hours of incurring them and then tabulating them.

From the second year onwards, pre-decide spending limits � again, just for one or two categories. It's vital that you do not overshoot these pre-decided limits. Simultaneously, keep adding more and more categories for noting down the expenses. Usually, it will take about two to three years before you are totally into your budget.

Follow a few of these pointers:

In the end, remember this quote: Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do... it is a matter of managing your money properly. Budgeting is the first step towards any management activity.

Gaurav Mashruwala is a certified financial planner. He can be reached at

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