How To Plan A Budget For A Family Of Four

It is a typical scenario: you and your spouse work very hard to give your children a great life. Every month you save diligently to take a much-deserved vacation with your family and for the future education of your kids. Unfortunately, though you earn well, there never seems to be any savings to give your family a decent life.

Does this sound familiar to you? If it does, then it is time to take stock of the situation and do something to reverse the scenario. Make that all-important household budget and free yourself from the circle of debts.

Making the Budget: Why it is Essential

You might hate the word budget, believing it restricts spending and forces you to live a frugal life. The truth is, a budget helps separate the needs from wants. A budget helps you spend on the right things and to save before you spend. (Income - Savings = Expenses).

Smart budgeting teaches you the 50/30/20 rule of saving. You divide your salary into three categories of expenses. About 50 per cent of your salary must be set aside for essential expenses like food, rent and clothing, 30 per cent for lifestyle expenses and the rest for repaying loan EMIs. A smart budget can help you save at least 10 per cent of your monthly salary, perhaps more.

What are the benefits of doing budgeting monthly? A budget helps you live within your income. You can identify unnecessary and extravagant expenses which can help you save your money. A budget helps attain financial goals by organising spending and saving. It allows you to save for emergencies and can give warning signs on a potential financial crisis.

Different ways for effective budgeting for a family of four

Write down all income and expenses

• The first step is to write down all sources of income in that month. The sources of income could be salary, rent, interest on fixed deposits, dividends from shares/mutual funds or any other income.
  
• You then list out all expenses including family expenses right from the grocery bills to fuel/rent and even loan EMIs. Don't leave any expenses out of the budget.
  
• You could make a budget using a notebook or an excel sheet. Keep a track of monthly income in one of the worksheets. In the next worksheet, keep a track of essential expenses like rent, food loan EMIs and so on.
  
• The final worksheet should include discretionary expenses like movies, parties and lifestyle expenses. Track income and expenses to get an idea on how much you earn and spend.
  
• Your household budget accounts for every rupee you earn and spend.
  

Manage all loan EMIs well

• One of the most difficult things today, is managing loan EMIs. Not being able to do so, could mean falling in the loan trap. People even take extreme steps, if they fall into a severe debt.
  
• Make sure that loan repayments do not exceed 50 per cent of your monthly income. If you have availed a home loan along with other loans, chances are loan EMIs could be close to almost half your monthly income.
  
• Car loan and personal Loan EMIs should not exceed 15 per cent and 10 per cent of net monthly income.
  
• Repaying loan EMIs on time is a priority and a smart budget helps pay loan EMIs on time.
  

Account for children's expenses

• The healthcare costs of a child are quite high, till she turns 4-5 years old. Make provisions in your budget for these healthcare costs.
  
• As the healthcare costs of children go down, education costs go up. Education costs shoot up when your child reaches college.
  
• Your budget must include children's healthcare and education as a top priority.
  

Budget for a financial emergency

• An essential part of a household budget, is to create an emergency fund. With the household budget, you can store six months of living expenses (Yours + Family's) in a savings bank account or a liquid fund.
  
• A study shows that more than 90 per cent of citizens between 30-45 years would have no money in an emergency. A household budget makes sure you don't fall in this category.
  

Make a flexible budget

Make a flexible budget where you transfer excess money from one category to another category. There's an exception to this rule. Never transfer excess money from emergency fund to any other category.

It's time to conclude but do remember this. Be truthful to yourself when you make a budget and don't make one that is too ambitious or sets unrealistic targets. Be Wise, Get Rich.

The author is CEO and Founder, IndianMoney.com

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