“The simplest definition of a budget is "telling your
money where to go.”– Tsh Oxenreider, Organized
Simplicity: The Clutter-Free Approach to Intentional Living
What do you do when you plan a journey? You decide on your destination and figure out the best possible way to get there. Budgeting for your future is similar to that if you consider life to be a journey. It could be easy to earn but far more difficult to manage your earnings and make them grow. Let us look at the basic rules to follow when you want to budget for your future.
Identify what you value - Before you create a budget, you should know what your priorities in life are. It could be owning a fancy house or going on a world tour, world-class education for your kids, starting your own business or whatever else. Once you figure out what are the goals or aspirations that you value the most, you will be able to work towards them.
Use the 50-30-20 rule - If you are confused about how to distribute your earnings towards the various heads, use the simple 50-30-20 rule where 50% goes towards meeting your needs or your basic expenses, 30% towards your wants or discretionary expenses and the remaining 20% towards savings/investments. This will ensure that you maintain your standard of living while saving a part of your income. The 30% allotted to wants can be used as you want. Whether you wish to use that to buy the latest smartphone or invest in a scheme of your choice or splurge on something else is up to you.
Track your expenses - If you can measure them, you can manage them. Knowing where your money goes is the best way of managing it. If you list out all your expenses for a couple of months, you will have a fair idea of how much you spend under various heads like rent, food, utilities, clothes, entertainment and so on. Once this is established, you will know how you are tracking each month and whether you are over the budget. It will help you cut down on discretionary spending and stay within your budget. Figures don’t lie and writing them down will tell you exactly how you are managing.
Limit your credit - Living beyond your paycheck is a common mistake that youngsters make and before they realise it they get trapped in the dangerous cycle of debt. Remember, a credit card is not an extension of your paycheck. Credit cards charge monthly interest on the outstanding amount. Never let your credit spending exceed 40% of your net income else your budget will go haywire and future goals unreachable. Instead, use your income prudently by planning your expenses, cutting down unnecessary spending and investing wisely. Spending beyond your means is the first thing to be avoided if you want to budget for a healthy future. The simple mantra should be not to buy what you cannot afford.
Have a diversified portfolio - It is important to be aware of all the investment options available. It is good to have an idea of the returns offered by various asset classes. This will help you to plan your investments. Creating a diversified portfolio across asset classes can help you manage market risks better. Instead of worrying about the size of the initial capital, it makes more sense to focus on planning to invest regularly and making that a part of your monthly budget.
Believe in ‘Slow and steady wins the race’ - As long as you have a clear roadmap for your future in the form of a budget which tells you how much you plan to spend, how much to save and to invest, you can be sure that regular investments via mutual funds starting at the beginning of your career might help you build a decent fund for the future. It is not about how much you earn but how well you spend each rupee that counts.
Let us sum up with an apt quote from Joe Biden, “Don't tell me what you value, show me your budget, and I'll tell you what you value.” Your goals, dreams and aspirations are spelt out in your budget. That is one of the best indicators of where you are headed and what you want to do with your life. Budget your future and you will have a readymade roadmap that will help you move towards your destination.
An investor education initiative by ICICI Prudential Mutual Fund
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