Credo Capital

You need a budget!

To quote Mr. Micawbers advice to David Copperfield “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds and six, result misery”

But most of think that we are actually saving i.e. we are spending less then we earn but if we ever were to write down our expenses every day we would be surprised surely after 365 days!!

Unfortunately many people think that they are earning well but in reality are not left with much. In advising clients I have seen that there is a tendency to think that they are ‘rich’. However when we try to chalk down what exactly was that they have saved compared to income some find that the savings is very little if at all. In fact in today’s world it’s not enough if we make 20 pounds and spend 19 result is not happiness but only 1 pound left!!

So, how does this happen. When we think about income we know it as salary is stable however expenses don’t happen monthly all the time. School fees are once in 4 months; Power is once in two months. Festivals, Holidays happen a few times a year and then there are the surprises. These are totally unpredictable what we can do is first record them preferably in advance. Here is how it can be done simply: List all expenses be it monthly, quarterly, annually, keep aside a certain amount for unpredictable’s. Now add up all of these and divide by 12. This is my monthly expense approximately.

See my Jan 2012 income and expense Just looking at this I feel happy because im saving 17000. Immediately I think of that great tablet pc which costs “only” 25000 Rs & rush to buy it with my “savings”.

What I conveniently forget is there are school fees due in February and the December Holidays happily spent with a credit card is due too. So when February ends I have only 12000 in hand still not bad but not as great as 17000 savings, right?

Now if we check what is due in March we see that since the old and faithful TV died, we need a new one so off goes another 21000, suddenly 2 big expenses one known ( Gym Fees) and the other unknown ( TV conking off) have now set us back to deficit.

If I had converted all my expenses to monthly then I would have known there is a deficit happening and be prepared for it instead of being negatively surprised at the deficit.

This is much more important for professionals or business persons whose earnings are never the same month on month. So they not only have to contend with jumpy expenses but jumpy income too & what’s more they don’t have an automatic savings plan or medical insurance like working class people do.

This article was published by the Chennai based Industrial Economist magazine in the last issue. Can be viewed online here http://industrialeconomist.com/curr/42.html