How to  set  goals for  effective  budgeting 
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How to  set  goals for  effective  budgeting !

How to set goals for effective budgeting 

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Suresh: The envelope method 

To begin, Arvind tried to calculate Suresh’s actual income using the following formula:

How to set goals for effective budgeting_2

Then, he asked Suresh to put his monthly expenses according to major categories i.e.household expenses, groceries, clothing, gas, utilities, etc.,following which he allocated a certain amount to each of the categories.

For instance:  

Groceries- Rs.3,000  

Gas- Rs. 1,000  

Household supplies- Rs. 3,000  

Then, Arvind helped Suresh create envelopesfor each of the different categories andput the money he decidedin each of them.He also asked Suresh to only usethe money in theenvelope and to never spend more thanthe amount he had already allocated.   

Thisnot only helped Suresh regulate wasteful spending, but it also madeit easier for him to repay loans, as he was able to usethe extra money he saved.   

Hema: Zero-sum Budget  

Hema’s problem was that she had no idea where her money was going- so Arvind asked her to track her expenses over the next three months to see where she was spending money and how much she was spending. Once she arrived at a total figure, she was able toidentify categories where she wasoverspending.Once shedid this, she reduced the budget for thatcategory in the next monthandput the extra money towards her savings.  

For example, she was spending almost Rs. 8000 for groceries every month.Through a combination of choosing cheaper alternatives and delaying some non-essential expenses, she was able to reduce her spending on groceries to Rs. 5,000, a figure she was comfortable with. Then, she put the other Rs. 3,000 into savings.

Following the same method for multiple categories, she found that she was comfortably able to save up both for her daughter’s school expenses as well as her year-end trip.  

 Ravi: The 70:30 Savings Ratio  

Since Ravi was planning for an early retirement, Arvind suggested the 70:30 ratio so that he could save while keeping up with his current expenses. Using the70:30 savings ratio, Raviallocated70% of his total incometoeveryday expensessuch asgrocery, home utilities,gas, rent, etc.He invested the other 30%towards various instruments of savingslike these:

  1. 10%split between a savingsaccountandemergency fund.  
  2. 10%towardstools for capital investment like NPS,PPF, or investment in mutual funds or shares.   
  3. 10% to be donated to a registered charitableorganisationto get the benefit of income tax deduction.  

By doing this, Ravi was able to see his retirement corpus increase substantiallyand save for the down payment on his car.  

Watch our video on creating a budget that suits you to design a budget based on your financial needs.

By following these methods, Ravi, Hema and Suresh were able to get on track for their saving goals within a year- and had enough money to comfortably afford the next year’s trip! For more methods on saving money, read our article on How to save money the right way.

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