Budgeting for the salaried person

India's annual budgeting exercise has already begun and the proposed Union Budget will be announced on the February 26, 2010.

This exercise is often the most-awaited one by the salaried people as the budget declares the tax implications for the next financial year.

However there is one other budget which is often forgotten and lands one in more trouble than expected if not planned properly. This budget is the personal budget of the salaried person.

This two-part article will help individuals budget in a better way.

Why budget when salaried?

Unlike our government which is able to run on a deficit budget (read as spending more than the income) for a long time, a salaried person cannot do so for more than a few months.

The reason being that the resource than one has to support the higher expense is very less. A loan from friends and family could be of help during emergencies, but cannot be used to run a family. Loans from financial institutions need to be paid back from the next month itself adding to the expenses in the budget. . . .

The most critical point is that the salary (which is the only income for 98 per cent of the salaried people) cannot be increased at one's wish/will. This means that the expenses have to be limited to the income.

Adding to the problem is that one has to plan for a number of future requirements too -- retirement, child's/children's education, house, bike/car, marriage, taking care of parents, computer for child, the diamond necklace for wife on the silver jubilee anniversary, etc, etc.

If one wants to satisfy any or all of the future requirements one has to budget.

The other major reason why one has to do budgeting is that inflation increases the cost of everything that one buys. So saying one loaf of bread is not enough. Because a loaf of bread cost about Rs 10 two years ago and today it drains over Rs 20 from our pockets.

Is the world against us?

Parkinson's Law states: 'Work expands to fill the time available for its completion.' Similarly, the expenses increase to consume the bank balance.

How many times have you had an experience that when you get a bonus, electronics equipment in the house start failing one after the other requiring replacements? Have you had one relative give you a gift, and another ask for the exactly same amount for an emergency? Or when you get a tax refund, your sister says she needs to buy a formal suit for her college?

Yes, one may think the entire world is against him/her. The way out is a simple tool called budget.  . . .

What is not a budget?

Before starting on working on one's budget, one has to understand what it is not.

1. Budget is not a magical tool

Just writing/creating budget is not enough for success. One has to think ahead, plan and then implement it too. Only then the effect of the budget can be seen.

A budget will give us warnings when we deviate from something planned. Without a budget two things do not happen: one does not have a plan and priorities for the expenses, and one does not have a benchmark for comparing one's expense to.

2. Budget is not rigid

A good budget will plan for any contingencies and also positive events. It will also have provisions to make use of rare opportunities -- from a fun filled trough of ice cream with kids to a candle lit dinner date.

3. Budget is not to limit one's lifestyle

Having a budget does not mean that one has to be an Uncle Scrooge (as in Walt Disney's creation). A budget is meant for maintaining ones' comfortable life style and also achieves dreams and goals will less financial stress.

4. Having a budget does not mean 'no loans'

One can budget for a loan in case it is required. In today's costs it is nearly impossible for a salaried person to think of buying a house purely from one's savings/investments.

A budget will allow for one's housing loan, or an educational loan, or car loan, etc.  . . .

5. Having low or no income does need a budget

In almost all cases, having a low income is more reason for one to have a proper budget. When income is higher than the expenses (for the blessed few), one has the liberty to be lax for a few months.

But for those with limited income and a lot of dreams in their eyes and minds, a budget is most essential. Imagine the days when one used to balance the expenses on a fixed shoe-string pocket money as a student.

What next?

This article has given a preview of why one needs a budget and also has given details of what a budget is not. The idea is to remove the myths surrounding budgeting.

Budgeting can be fun to plan and implement. The reason is that many of the financial burdens would have been planned for and unexpected expenses can easily be accommodated. This reduces financial stress in a big way.

NOTE: In the second part of the article tomorrow, the method to create a proper budget will be discussed.