The how and why of budgeting for the young

Meet Milan Mehta, 28 years, businessman, who when asked about budget says, "Why do I need to maintain a budget when I have enough money to spend as and when I need."

Is this true that you do not need to budget when you have money to flaunt.

Or meet Kunal Zaveri, all of 20 years, a college student who says, "Why do I need a budget when I am still not earning and I have no income."

The common notion that budgeting is for poor people or for people with loads of money is wrong. Even fortune 500 companies maintain budget within which they work.

So what is a budget?

Budget is an estimation of your income and expenses over a specified future period of time. Importantly, it is a tool to get the right balance in your financial life between your income and expenses. Mark the plural of expense and singular of income! How very true, you may feel.

How to get started?

Many people complain as to how to get started. It can be especially difficult for people with variable income. Budgeting has less to do with your income, but more so with how you spend it.

• How well can you understand the budget

Regardless of how much you earn everyone have expenses which can be classified into:

Fixed -- This can be further divided into:

~ Mandatory expenses like mortgage, mediclaim, life insurance, PPF and others.

~ Variable expenses like facilities at club.

Variable -- This can be further divided into:

~ Mandatory expenses -- food, utilities, tax, clothing, pet care and others.

~ Variable -- entertainment, vacations, gifts and others.

This classification not only helps you to understand the outflow, but also the quality of your spending. By quality of spending we mean effective use of your resources to meet your needs and responsibilities. It also means not going overboard with your expenditure on any of the above heads.

Excess expenditure occurs when you consider certain avoidable expenses as mandatory. For example, one spends in excess of her/his capacity like purchase of latest mobile etc only to maintain their status in the society. These become mandatory expenditure for them when left uncontrolled. These can certainly be avoided.

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You have to strike a balance between mandatory and variable expenses keeping in mind that after meeting these expenses you still have your goals and dreams to be met. You also have to save for your retirement.

A person not only has to think about meeting her/his goals and dreams but also have to maintain an emergency fund for any unfortunate events. Ideally an amount equivalent to three months of household expenditure has to be kept aside to meet any emergencies. 

When to start?

Instilling the need for accounting has to start right from the age when your child starts comprehending things. This will not only make her/him disciplined in life but also assure that s/he does not fall in the loop of credit cards or bad debts.

Why Budgeting?

Budget should not only be for your house but also for you as individuals. You have to maintain a record of your personal expenditures. It is very important to compare your actual expenditures with the budget you have prepared.

Ask Khyati Shah, 25, Chartered Accountant who says, "It is very important to compare your actual expenditure with your budget. This will ensure that your resources are used optimally and you lead a financially stable life. It will ensure that you do not fall for credit cards."

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Just as Rushabh Parekh, 18 years, an engineering student says, "My father had always instilled in me and my brother that you have to know where your money is going. Today Rushabh has a complete list of his expenses and here's how he accounts for every penny he spends.

"This helps me to control and discipline my expenses. As I maintain proper records and I compare them with my budget, it helps me to know where I have gone overboard in my expenditure and where I need to cut corners."

Conclusion

Budgeting is a financial survival tool for today and tomorrow. Thus it is only adequate that every household and every individual should have a budget. Even though budget has negative connotation attached to it, it is the right tool for a financially sound life as a financially stable life means a stable personal life.

The only con I could think is -- too stringent a budget can de-motivate you to actually follow it.

If you still cannot avoid your expenditure then the only other way to balance it is by increasing your income.