Budget wish lists, budget expectations, live telecast/webcast of budget speech, discussions and analysis on various TV channels/ newspapers/magazines, elation & disappointment, joy and distress etc. - it's like a carnival.
But have we ever pondered over the need to prepare our own household budget. More often than not we tend to live from salary to salary, without seriously giving thought to either balancing our own budget or financial planning.
The question one may ask - why budget? The answer - B.U.D.G.E.T.
It is a beacon
Budget is the roadmap to our financial success and independence. Budget tells us where are we heading financially. Will it be a life of financial freedom? Or would we be always struggling for money? Would we be in debt or lead a debt-free life?
Living without a budget is akin to driving without any destination in mind. We would burn up a lot of petrol (a costly proposition) and still end up nowhere. Budget provides the necessary 'purpose' and 'direction' to our financial journey.
A budget can act as an early warning signal, which can help us to take corrective action and a any financial disaster.
Checks unnecessary spending
A budget shifts the power from money to you. You become the master and manage the money rather than money managing you.
On one hand the incomes are usually limited. But when it comes to spending, the options are almost unlimited. This is truer today with the boom in consumerism. Therefore, it becomes imperative that we manage our resources diligently if we are to avoid any financial stress and meet our important expenses - food, clothing, shelter, education - comfortably.
Once we list down our expenses we can identify the areas of financial waste and take necessary steps to curtail needless expenses.
Helps manage debt
A budget warns us if we are living beyond our means. With easy availability of finance - by way of credit card, personal loans, EMI-based purchases etc - we tend to overspend and end-up straining our finances, even before we realise. The result is debt-trap and the consequent tensions and trauma.
Budget helps us to avoid the debt traps. Suitably aligning our spending pattern can free up a lot of cash, which can be used to rationalise one's debt and work towards becoming debt-free in due course of time.
We can then manage debt to our advantage, rather than compromise our future for a few moments of pleasure today.
Promotes goal setting
We all have certain basic needs. Apart from this we also have our dreams and aspirations. Be it a car, a house, children's education and marriage, foreign trip etc., it all usually ends up on the question of money. A clear view of our financial position assists in defining our possibilities. It helps the family to prioritize and focus on important goals. The financial milestones get defined.
More importantly, it sets a direction for our saving and investment pattern. It helps in proper asset allocation.
Usually we earn, we spend and whatever remains we save. This strategy generally fails to build-up the desired wealth. Instead, we should first earmark a per cent of our income towards saving and investing. And then work out the expenses around the balance income. This discipline of forced savings is a must to curtail impulse buying.
Prepares for emergencies
Any emergency, e.g. an immediate need for medical attention, can be very traumatic. If on top of this we have no idea of how to arrange for finance at a short notice, then we are only compounding the problem.
If we are in control of our finances, we can deal with any crisis situation more effectively.
While making a budget we should plan to set aside a small amount regularly and build up an 'emergency corpus'. This will come in quite handy. And this amount should be kept in a short-term investment option like bank FD or money-market MF so that it is easily accessible.
And in case any money from your 'emergency corpus' has been used, replenishing it should be the top priority.
Taste financial success
And last but not the least, a budget helps us to stop worrying and start 'enjoying' our money.
As we keep achieving our desired goals as planned, there is a sense of satisfaction, a sense of achievement. When we are out for a movie/dinner or on a vacation, we don't have any unpaid bills haunting us. The taste of this financial success is sweet and long lasting than any impulse purchase.
And before one concludes, a warning - preparing a budget is relatively the easier part of the job. The difficult part is adhering to it - month after month, year after year. It requires time and commitment. One has to be patient and determined, or else it will end up like the umpteen new-year resolutions - only promises and no concrete result.
The author is an investment advisor. He can be reached at smatai@hotmail.com