Budget for your savings and not spending!

By
Hemant Beniwal
19

Warren Buffet said, that we should not save what is left after spending but spend what is left after savings. And these words come from a person who is regarded as the Best Ever Investor in Human History.
People are not able to plan for their savings because there is no financial plan that they have which clearly spells the requirement for savings to meet your future goals. Many a times, people find that their financial position is good as they are able to meet their current liabilities with their current income. Taking this as background, as their income increases, so their expenses. There are times, when people go to unplanned exotic vacations as they have received bonus or impulsive buying takes place as bank balances is good enough to support this.

Read – Budgeting – The First Step to Financial Success

What is your definition:

Budget your savings
Read- ELSS : Best tax saving instrument – undoubtedly

Savings have to be planned well in advanced and it should be quantified as well. At best what people do is that they make tax saving investment and that too at the end of the year under compulsion. They end up investing where others are also making their investments. If there is no plan to save, people land up having huge surpluses in their banks which is does not give any returns to boast off or they land up having in financial crisis as some huge expenditure have come on their way for which there was no planning.

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A good savings plan should be drawn taking inflation factor, future income growth etc. But before we plan to save for future, you must ensure that you have a solid base, which means planning for any contingency, including disability and death etc. So, depending on the consistency of income, one must at least have 4-6 months’ worth of expenses in fixed deposits, floating rate funds or investments against which overdrafts can be taken. Additionally, you need to ensure that you have sufficient medical cover for your dependents.

Then for long term goals a product mix of equity debt should be taken more tilted towards equity and for short to medium goals, debt should be more than equity.

Let each goal is defined in terms of expected time of occurrence, its expected cost on your wallet and how should you be approaching them with the right mix of equity and debt.

We will try explain how tackle major goals in our life like that of retirement, kids higher education etc later.

Would you like to share what is your strategy?

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19 COMMENTS

  1. I think if you have some moderately hard goals of saving money, it motivates you to keep aside something at the beginning of every month, and build savings.

    At the end of say six months or so you have a decent chunk of change, and the mental satisfaction of having achieved something, and that spurs some more good behavior. Keeping these kind of goals have worked for me, and I’ll recommend others to try it out as well.

    • Hi Manshu and Hemant
      I agree.Having clear cut goals in life is the most important motivating factor for saving and investing. Unfortunately, most of the people just want to save and others to save and invest without having well defined goals.Another point about lack of serious saving and investing is ignorance of the impact of inflation on quickly eroding savings. Unless people are made aware of the consequences of ever increasing inflation, people can not be expected to take investing seriously.I think the main focus has to be on inflation in any serious and meaningful investor education.

    • Hi Manshu,
      I agree with you & once you have a good chunk of money – it gives you motivation to be on track. Even if someone starts budgeting expenses – he should start with fixed expenses rather than variable expenses.

      • Hi Hemant and Manshu
        I think good financial behaviour is the key issue here.Whereas a good chunk of money is a motivating force for a person with rational financial behaviour to invest, it spurs a person with irrational financial behaviour to splurge.I think what people need most are lessons in Behavioural Finance.

  2. Hi Hemant
    About five years back I used to do a lot of impulsive shopping.The reason for this was that I used to keep a lot of cash at home and carry my credit cards with me whenever I used to go out.The strategy adopted by me is as follows.
    Since I have two ATMs very close to my house I keep very small amount of cash at home as I can withdraw cash from ATMs using my Debit Card as and when needed.
    I have locked my Credit Cards and I have not used one for the last five years.
    I do not use netbanking or mobilebanking for carrying out any financial transactions.
    I never use my debit card for making any payment.It is used only as an ATM card for withdrawing cash.

    • Hi Anil,
      Misuse of credit cards is the biggest reason – why younger generation moving in debt trap. Power of card makes you blind – will never be able to diffrentiate between needs & wants.

      • Hi Hemant
        Thanks! Fortunately, although my daughter has two debit cards, she has not started using them so far.Whenever she wants to buy anything she prefers to take money from me.

  3. Hello All,

    Another excellent article by Hemant.. Proper planning is necessary to achieve the target..Even If we plan for a vacation..one should plan it 1 year before..and the money that you spend for vacation should be the money that is left with you after completing the investment for that particular year of your portfolio.

  4. Hello Hemant,

    I would like to ask you one question.. I know that you are not a big fan of insurance investment policies and you have put some valid points as well regarding the same n I totally agree with that.. you have also said that PF is the best form of debt investment with 8 %. Recently I have seen some of the financial experts saying that Govt is actually doing charity by keeping PF rate upto 8 % and in the future it might reduce to 5.5 or 6 %. So my question here is that is it the right strategy to invest money in PF as a debt option because LIC has some very good options of debt scheme like Jeevan aastha which has guaranteed returns of 10% and the locking period of just 5 yrs and also gives tax benefit. I know that Jeevan Aastha policy is closed but LIC keeps on coming with such policies time n time again apart from ridiculous Ulip policies.
    So why not prefer LIC for debt instead of PF.. would like to hear your views on this Hemant..

    • Hi Manoj,
      I am not sure about the latest updates on Jeevan Aastha – but it was never 10%. It is Rs 100 bonus per 1000 SA (create confusion of 10%) but it is much less than this & definitely lower than 8% CAGR that you are getting in PPF.
      Govt is trying to link PPF rates with market rates(gilt) but sooner or later everything is going to be market linked. If they do this in current year – you can expect rate hike. (means more than 8%)

  5. hemant sir,
    I want a very good policy for my child with low investment and high return.I have done some study also but all child plan looks similar with one another.
    Will you please guide me in finding good child policy and kindly suggest me the name of the policy and from which house

  7. Hi Hemant,

    Learn a lot but still its a never ending process. As like SIP i want to know more about liquid funds . How can we identify the good one for our short term investments.

    Reagrds,

    • Hi Munish,
      You can go for low expense liquid plus fund from some good amc. There will be not much difference in performance & as your horizon is short term it will not impact much in your final outcome.

  9. Wow. another gudie for better financial planning 🙂
    hope I had come across this early in my life. I feel I am too late, though I am 28 now.

  10. I completely agree with Hemanth, Anil and Manshu. As you said Expenses should be income-savings. Also I decided long back that I never use Credit Card in my life. I don’t need it. I can manage my financial things with 2-3 Debit Cards.

    Cheers to Hemanth for educating the people in personal finance!!

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