Managing cost budgets-Know your true savings month on month

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Have you managed your cost budget and know your true savings month on month ?

Overview of "Managing budget"

Many of us complain stating that in some months we spend abnormal expenses either for children education, car maintenance or insurance payments and our savings month on month fluctuate.

How to identify the true savings month on month is a big challenge for any one.

I would be telling you simple tips on identification of true savings month on month. These guidelines can be adopted by anyone. Please follow the below 3 steps to manager your costs budgets

 

Step-1 – Expenses categorization – "Fixed monthly expenses"
Identify your expenses into 2 categories. One is which is regular in nature and re-curring month on month. The expenses fall under this category are your EMI installments/groceries/rations/telephone & mobile charges etc., Pls remember they should be monthly recurring in nature. These can be termed as "fixed monthly expenses". For e.g. Groceries-Rs.6,000; Monthly EMIs-Rs.4,000;Telephones and others-Rs.2,000 = Total Rs.12,000

Step-2 – Expenses categorization – Non-recurring expenses in a year
Now it comes the non-recurring expenses you are spending month on month. The expenses fall under this category are Quarterly/Yearly insurance payments, child education expenses paid Quarterly/halfyearly/yearly, car service charges (annual services)

Step-3-Expenses categorization – Non recurring expenses for a month
Once you identified the non-recurring expenses, simply divide this by 12 (12 months in a year). This would give you average monthly expenses which you need to allocate for non recurring expenses. For e.g. If you are spending Rs.16,000 for Insurance and Rs.20,000 for children education, the total expenses are Rs.36,000. You are spending approx Rs.3,000 (Rs.36,000 / 12 months) towards your non recurring monthly expenses.

 

Step-4 – Knowing your true savings month on month
If you have total monthly income of Rs.25,000 and fixed monthly expenses which you are spending are Rs.12,000 (Step-2) and recurring expenses apportionment (Step-3) of Rs.3,000. Your net savings month on month would be Rs.10,000

(Fixed income-Rs.25,000 minus Monthly fixed expenses-Rs.12,000 minus recurring expenses monthly apportionment Rs.3,000).

 
Monthly Budgetting
  Amount
Income 25,000
   
Fixed expenses  
Groceries 6,000
Monthly EMI 4,000
Telephone/mobile phone charges 2,000
Total fixed expenses 12,000
   
Provisioning for Non-recurring expenses 3,000
Total expenses 15,000
   
Savings per month 10,000

Step-5 – Managing non-recurring expenses month on month

Take out Rs.3,000 monthly as "Recurring expenses apportionment" and keep them seperately. You can use them in seperate bank account and should be identifed seperately. Use this accumulated money month on month for the abnormal expenses which you have planned.

Using the provisioning amounts for abnormal expenses month on month.

 

Month Balance at the beginning of the month Monthly allocation Insurance pymt Children Education expenses Balance at the end of the month
May-12 0 3,000     3,000
Jun-12 3,000 3,000     6,000
Jul-12 6,000 3,000     9,000
Aug-12 9,000 3,000     12,000
Sep-12 12,000 3,000   -10,000 5,000
Oct-12 5,000 3,000 -8,000   0
Nov-12 0 3,000     3,000
Dec-12 3,000 3,000     6,000
Jan-13 6,000 3,000     9,000
Feb-13 9,000 3,000     12,000
Mar-13 12,000 3,000   -10,000 5,000
Apr-13 5,000 3,000 -8,000   0

Budgetting in this way would not have any impact on abnormal expenses and you know your true savings month on month.

Happy budgeting !!!

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Suresh

Myinvestmentideas.com

Suresh KP
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