As your life progresses, you will find new responsibilities, new expenses, and financial matters falling on your way. The only way to maintain your efficiency of dealing with these many heads is to get more organised with your monthly dealings with money. Budgeting is the first, simplest and most important step towards efficiently handling your money.
It can ensure that you always have adequate savings, health and life insurance, and adequate money to look after your monthly household needs.
With budgeting, you create a spending plan for the income you are generating. The process will ensure you have enough money for things you need and prioritise your limited resources accordingly. When you budget your expenses, you also learn to prioritize your expenses.
These five budgeting tips (steps) will help you maintain your monthly budget:
1. Deduct Insurance & Retirement Costs
Insurance is a part of your contingency plan while retirement is an inevitable stage of life. Both need little monthly contributions out of your income. Thus, the income you can plan your present and future on should be counted only after you have deducted:
a) Retirement goal contribution (a % of your monthly income)b) Cost of term life insurance and health insurance covers (only the protection plans)
For example, you earn Rs 1 lakh a month, and contribute 10% towards your retirement and pay about Rs. 2000 a month towards insurance protection (term life and health insurance covers). You simply assume your monthly salary as Rs 88,000.
If you are a member of EPF or NPS plans at your employer for retirement, your retirement contribution will be automatically taken care of, unless you want to save more.
2. Pay Yourself and Family
The amount remaining after retirement and insurance protection is the amount of income you earn for running everything else in your life. Out of this money you need to fix the two types of expenses in your family - mandatory and discretionary.
a) The mandatory expenses are your rent, your child's school fee, phone bills, etc.b) Discretionary expenses will include expenses on entertainment, travel, shopping, etc.
When you decide to pay yourself first, you take care of the mandatory expenses first and then prioritize your discretionary expenses. Remember that putting a monthly limit to your lifestyle expenses is important to control the family spending and a secure financial future.
3. Allocate to Long-Term Goals
The remaining amount is your money towards your and your family’s long-term financial goals. Ideally, you should be able to save and invest 30 - 40% of your total income towards your long-term goals. But any higher percentage will obviously ensure a more prosperous future.
When you save for the long term, you should invest in long-term saving schemes with maximum tax benefits and growth options. Below are the few plans you can invest in for maximum tax savings, as per your risk appetite:
Invest 4G ULIP Plan
Invest 4G is a unit-linked insurance plan for long-term goals. Here’s how and where you should use this investment plan:
a. Invest in Equity-Debt Portfolio
Depending on your risk profile, you have an option to choose the mix of equity and debt funds to allocate your investment.
b. Manage Portfolio Automatically
If you are investing in an equity fund, you don't want to spend time regularly managing them. Invest4G helps you achieve that through its four automated portfolio management strategies:
- Systematic Transfer Plan (for Rupee Cost Averaging while investing in equity funds)
- Return Protector Option (lowers your equity exposure with time and saves your return from the equity in debt funds)
- Auto Fund Rebalancing (maintains the risk-return ratio of the folio until you decide to change it)
- Safety Switch Option (safeguards your equity fund growth by systematically transferring the entire fund balance to debt funds in the final four years of the policy)
c. Bonus Units
Since you are investing for the long term, Invest4G will give you a few extra units as a bonus if you have paid all your premium on time and stay invested for ten years.
d. Taxation of Investments & Withdrawals
Money invested in the plan is eligible for an 80C deduction. The maturity value or withdrawals after the lock-in period of five years are tax-free.
Guaranteed Savings Plan
A Guaranteed Saving Plan is made for you if you are a safe investor. You may also want to use this plan if you need to invest for a goal where you cannot compromise on the value of it, for example, a child’s higher education and your retirement corpus.
Here are the features of Guaranteed Savings Plans which make it suitable for such goals:
a) Guaranteed maturity valueb) Guaranteed bonuses for long term investorsc) Avail loan against your policy at a low rate of interest in the case of important financial need before maturityd) Protect your family’s future goal with a premium protection option. The insurer will pay the remaining due premiums on your behalf in case of your early demise.
4. Allocate to Short-term Goals
You have been postponing your larger lifestyle expenses. However, someday you want to achieve them as well. So, your larger lifestyle expense, for example, modern home interior, high-quality lifestyle gadgets, etc. may become your short term financial goals.
You not only have to save for your long term goals but also your short-term requirements. You invest in the short-term saving schemes for going on a vacation, buying a car, etc. These will include:
a) Debt Mutual fundsb) Bank FDs or Recurring Depositsc) Post Office Saving Plans
Remember that for short term goals of less than five years, you should keep your money in a safe investment option.
5. Record and Watch for Mismatch
Plans are never perfect. The purpose of a plan is to provide a direction to your thoughts and actions. So is your budget. It serves as a reference point for your financial actions. If you can follow it accurately, nothing better than that. But often your actions may deviate from the planned course due to circumstances.
Investing for Income After Retirement
You have to make some long-term investments that will ensure you get regular income post-retirement. Canara HSBC Oriental Bank of Commerce Life Insurance offers you two different plans for reliable lifetime income after retirement.
You can choose from either of these three plans for guaranteed income:
a) Pension4Lifeb) Guaranteed Income4Life
It is a deferred annuity plan you can use to invest your retirement corpus and receive regular income. The plan will ensure you receive guaranteed income post your retirement as per your needs:
a) Monthly pension post-retirement until death or 99 years of ageb) Hold jointly to ensure the income continues for your spouse until his/her demise of 99 years of agec) In case of a demise of a policyholder, the beneficiaries get the death benefitd) You can get a loan facility to meet your short term financial needs
This plan also offers a deferred annuity for post-retirement pension. However, unlike the Pension4Life plan, you can invest in this plan annually for up to 10 years. Thus, accumulating a larger corpus and enjoying annual tax savings as well.
Thus, the best thing to do is to evaluate and find if your expenses are in line with your budget. If there are any expenses that are running too far up or down the budgeted line. Then you figure out where you are going wrong and take the necessary actions.