Budgeting and planning form contours of family finance

Budgeting and planning form inseparable part of family finance, which can be defined in simple terms ‘as a plan to meet financial needs of a family in all respects’. It could be providing financial support for day-to-day requirements such as consumption and for the future forecasting financial needs of the family.

That apart, it can include providing for contingencies and to take care of the family during difficult and rainy days. There could be loan liabilities on account of house, car and personal loans availed. Provision needs to be done to meet their EMIs. Helping the needy relatives and the friends who form part of the extended family could also be included in the family finance.

Budgeting
Budgeting is a first step in managing the family finance. It is to allocate the income for different expenditures. As one is aware the income that he or she gets every month which is almost and by and large fixed, one should judiciously allocate the same for different items of expenditures.

The thumb rule in allocating the income is 50% for consumption, 30% for lifestyle and 20% for saving. While providing for expenditures in the budget the MSC rule i.e. must, should and could be followed. That is expenditure on account of consumption, medical needs, servicing of EMIs for loans taken may form part of ‘must’ expenditures’.

The expenditures of lesser importance such as entertainment, outing and hotel may form part of ‘should’ expenditures. The rest of the expenses can be classified under ‘could’ category, may or may not be provisioned in the budget.

Maslow’s theory of hierarchy which prioritises physiological needs such as food, clothing and shelter over others may be followed while preparing the budget. Take care of physiological needs first and think moving upwards to self actualisation i.e. ‘what man can be, he must be’ as in the Maslow’s pyramid.

Though the thumb rule says 20% of income while budgeting is to be kept apart for savings, forecasting the expenses on education and marriage of the children, family functions and rituals and contingencies, savings could be increased if ones income permits.

Planning
The next important step in family finance is planning. Foreseeing the expenditures and arranging the finance timely also form a part of planning. For laying the savings, the bank’s recurring/fixed deposits, deposits into PPF accounts, investment in mutual funds and children’s insurance policies come in handy.

While the bank’s deposits yield steady returns, they are safe and liquid. Investments could be in Public Provident Fund accounts which fetch fairly good returns in these days of dwindling banks’ interest rates — presently 8.50%.

Amount deposited in PPF account to the extent of Rs 1.50 lakh qualifies for income tax rebate under section 80(c). The interest and withdrawals are also exempt from tax as on date. PPF accounts are tailor-made for long-term investments meant for meeting expenses of education and marriage of the children.

Investments in mutual funds can also be considered as they tend to yield handsome returns in the long run. Dividend received from mutual funds is exempt from income tax. 

Outlay of expenditure
The children’s insurance policies can be obtained at any age of the child — say
0-18 years, and payments under the policy usually start from the 21st year when the funds are most needed either for education or marriage of the child.

While planning for investment in different avenues, plan meticulously and ensure returns match/are nearer to the inflation rate.

Since the education and the marriage require huge outlay of expenditure, the savings should start at an early age of the child and in appropriate sums to yield the desired maturity amount. 

Out of the amount preserved for savings in the budget, one may obtain health insurance policy covering the family. It is worth having one cashless medical policy in these days of prohibitive health costs. Premium paid for such policies is also exempt up to Rs 25,000 to Rs 30,000  for senior citizens under Sec 80 (d) of Income Tax Act.

One-fifth of 20% of savings could be held in highly liquid avenues to meet unforeseen expenses.

Many banks open Savings Bank plus accounts wherein the amounts deposited in such accounts get swept to fixed deposits for periods determined by the depositor and as and when withdrawn from SB Plus account, last in fixed deposit gets broken and the balance is made available in the SB account maximising returns/yields.

(The writer is Chief Manager (Retired) at State Bank of Mysore)