How to plan your Expenses?

Arjuna (Fictional Character): Krishna, Last week we discussed about how to calculate sufficiency of income! Now that income is earned, Why it is so important to plan one’s expenses?

Krishna (Fictional Character): Arjuna, Planning your expenses holds significant importance. It forms the base of financial stability and empowerment. By meticulously tracking where every rupee spent, you gain invaluable insights into your spending habits, paving the way for informed decisions that align with your financial goals. This practice not only helps in avoiding debt and reducing financial stress but also in safeguarding against impulsive spending and unforeseen financial hardships.

Arjuna (Fictional Character): Krishna, what should be the approach the plan financial expenses?

Krishna (Fictional Character): Arjuna, There is a simple rule which one should follow i.e the 50-30-20 Rule. It involves allocating 50% of your net income to essential needs, 30% to wants or discretionary expenses, and the remaining 20% towards savings and debt repayments.

For example, if your monthly take-home income is ₹50,000, you would allocate ₹25,000 (50%) for needs like rent and groceries, ₹15,000 (30%) for wants such as dining out and hobbies, and ₹10,000 (20%) for savings or paying off debts.

Following are the head of expenses which fall under the 50-30-20 rule

1. Needs (50% of Income)

1. Housing: Rent or mortgage payments, property taxes, homeowners association fees.
2. Utilities: Electricity, water, gas, internet, and phone bills.
3. Groceries: Food and basic household supplies.
4. Insurance: Health, car, home, and life insurance.
5. Transportation: Public transport costs, car maintenance, fuel.
6. Childcare: If applicable, daycare, school fees, babysitting.
7. Healthcare: Regular medical check-ups, prescriptions, emergency medical expenses.

2. Wants (30% of Income)

1. Dining Out: Restaurants, coffee shops, takeout.
2. Entertainment: Movies, concerts, streaming services.
3. Hobbies: Clubs, sports, arts and craft materials.
4. Travel: Vacations, weekend trips.
5. Shopping: Non-essential clothing, gadgets, home decor.
6. Subscriptions and Memberships: Gym, magazines, clubs.
7. Personal Care: Salon visits, spa treatments, cosmetics.

3. Savings and Debt Repayment (20% of Income)

1. Emergency Fund: Contributions to a fund for unforeseen expenses.
2. Retirement Savings: Contributions to retirement accounts.
3. Investments: Stock market, mutual funds, other investment vehicles.
4. Debt Repayment: Above the minimum payments on loans or credit cards.
5. Education Savings: Contributions to education funds for children.
6. Long-term Savings Goals: Down payment for a house, a new car, or other large future purchases.

Arjuna (Fictional Character): Krishna, What should one learn from this?

Krishna (Fictional Character): Arjuna, Planning of expenses is not easy as it seems. In this era where payments can be made so easily by PhonePe and Google Pay. It sometimes becomes impossible to keep a track of payments made. Nowadays even small small payments are being made through scan of QR Code which makes it even more difficult. Hence one should always have 2 bank accounts, 1 A/c should be kept only for expenses and payment of expenses should be made from the expense account and only the expenses bank account should be linked with PhonePe and GooglePay. Everyone should add notes to their UPI transactions for better tracking those expenses. Also, these days a lot of apps provides services for tracking your money which can be used or some manual registers can be maintained. This way, one can effectively plan their expenses and come close to saving income for emergencies and investments.