A penny saved, a penny earned and other insights into the art of budgeting

Budgeting tips: Start with some kind of allocation of your periodical expenses, even if it's very rudimentary. You can adopt a more sophisticated approach later

With Union Budget 2022 just around the corner, it is also a good time to revisit your own household budget or have a plan in place, if you haven't already. Behavioural finance experts have always recommended pegging calendar events such as birthdays, anniversaries, and Union Budget Day to financial actions like reviewing one's portfolio, making a budget and such like. M Barve, founder, MB Wealth Financial Solutions says, "Personal finance is personal first and about finance later. So, even a basic household budget strategy will vary from individual to individual, and household to household. What may work for one may not work for another." Here are a few household budget strategies to choose from, from the most popular to social media trendsetters, from passive to more traditional ones.

Budgeting 50-30-20: This is probably the most popular method of budgeting across the globe. It takes the post-tax income of an individual and apportions the expenses in the following manner: 50 per cent of disposable income spent on needs, 30 per cent on wants, 20 per cent towards savings and investments. Needs are your day-to-day living expenses, including mortgage, utility bills, grocery payments--all of which are mandatory or necessary. Wants are discretionary expenses such as going to the movie, eating out, or buying the latest gadget.  Experts recommend you save and invest at least 20 per cent of your post-tax income.

Dilshad Billimoria, Board Member, Association of Registered Investment Advisors (ARIA), adds, "In India, we recommend 30-35 per cent of one’s post-tax savings towards investments and long-term goals. The rule helps individuals create budgets and manage their money towards the three intended requirements and thus helps achieve their financial goals." Some planners use a modified version of this rule, where the ratios remain the same but the allocation varies. 

Kakeibo: This a century-old budgeting technique from Japan that helps you spend mindfully and save more. It is becoming popular on social media and the real world. It's basically a household financial ledger or a physical budgeting journal. You must answer some financial questions and set savings goals. Ranjit Dani, Nagpur-based certified financial planner (CFP), says, "Then they track your expenses, put your purchases in categories, and review expenses at the end of every month. You get a realistic picture, and you get a clearer understanding of spending habits, and then controlling expenses becomes easy." This technique helps you rethink your spending and understand why you are making each purchase. The method works very well for those having trouble sticking to a budget, first-time budgeters and the reluctant kind as well. Dani says, "Writing is far more powerful and effective then putting data on computer or mobile, as your senses are involved and help you get better off your spending temptations."

Spend First: Here you just plan your spending each month and save whatever is left over. This works for those whose spending is well below their earning.

Pay Yourself First: Here, at the beginning of the month, put away the amount you wish to save and invest, and then plan your expenses with what is left. "You simply pay yourself first and there's no need to track any spending. It keeps things simple; this is a good method," says Dani. Begin by keeping aside at least 10 per cent of your monthly income. Increase this figure gradually.

Envelope methods via apps: This is a traditional method used by many for years. Here money is divided in various categories and kept in envelopes with heads of expenditure like utility bills, household expenses, and rent payment. Tracking these over a few months helps determine the likely costs for each head of expenditure and mention the amount on top of the envelope. Billimoria says, "At the end of the month, any accumulated savings is either retained in that envelope or moved toward the emergency fund expense pool. "This method can be used for cash using envelopes or for credit card or bank payments using software to do the same. This software categorises the expenditure under various heads. One software product in this space is Walnut Expense Software. Billimoria says, "The benefit of this method isthat it provides for good budgeting of one’s expense and maintains the limits set aside in each envelope or under each head for the respective expense."

Every rupee budget:  This approach uses a simple equation. At the end of the month, your income minus your expenses should equal to zero. You assign a goal to every rupee, be it as an expense, savings or investment. Allocate money to each of these categories until nothing is left. Some call this method zero-based budget. Barve says, "Track your expenses during the month to ensure they're in line with your budget. This is a more detailed planning approach." Allocation to each category at the start of each month should not be automatic but should be questioned and reduced if found superfluous. This is an advanced method, and not for everyone. It might also get a little difficult to follow it over a long period of time.

Choose the budget type that sounds most logical and seems to fit your lifestyle and habits. You will have to try out a few before you get the one that works for you. Technology does come handy with its array of apps, but if you like a non-digital approach, even a basic physical journal works well. The most important thing is for you to develop money management skills in a way that your financial health improves and you are able to achieve your goals.

What is Kakeibo?

• It's a physical budgeting journal
• Calculate your monthly income and subtract fixed expenses
• Set a savings goal for the month
• List your spending categories eg needs, wants culture (entertainment) and unexpected expenses
• Record all your purchases under their appropriate section and include the purchase amount
• Answer four reflection questions at the end of the month
• How much money do you have?
• How much money would you like to save?
• How much money are you spending?
• How can you improve?
• The goal is to increase your savings, repeat process every month