Planning annual budget for your home is as challenging as planning budget for a large organization. Recording Income, expense, investment and savings is of great help. Recording your financial data is first step towards planning your budget.

However, merely entering data in itself is not enough. What is equally important is organizing or grouping them in correct sets. As mentioned in my previous post, expenses should be recorded in four categories; Fixed Expense, Variable Expense, Non Regular Expense and One Time Expense (read grouping expense in previous post). They help you in identifying areas where you can save.

Expense when grouped correctly, reveals pattern. Expense pattern reveals habits and more importantly reveals scope of savings.

As you start recording your expense you will understand your cash requirement (monthly and annual). This when subtracted from income gives annual savings potential. Further, your investment needs and potentials are more visible once you know your savings potential.

Recording expense is important because your financial planning largely depends on how much you can earn, save and invest. Start today.

Beat the Inflation

For past one year, we have been experiencing regular rise in our grocery bills, so last week when the news break out of inflation touching 7% mark, me and my wife were not so surprised. Our budget for next financial year did address this concern and we had identified areas where we can cut cost to manage expenses.

For us to identify these areas of cost cutting, it was necessary to have data of all our expenses. We have been maintaining records of our income, expense, investment and savings for past 4 year in very elaborate manner. So if you ask me today, what was my shopping bill and grocery bill for May 2006? I have precise answer to that.

Now, most of us maintain that kind of records / data. But what really matter is that how helpful this has been. It really would mean no sense, if data we collect cannot be used for improvising. My point here is that how you group your expenses in various categories. Is it important? Answer is yes, else how you identify areas of cost cutting.

Grouping your expense

Most of us group our expenses in two categories, namely, fixed and variable. I suggest you divide them into 4 categories, Fixed expense, Variable expense, Non-Regular expense and One Time expense. On top of that, records of Investment, insurance and loans / EMI should be maintained separately.

Fixed Expense ' House rent, building maintenance, electricity, water, maid, milk newspaper etc which are sure to happen at fixed cost (approximately), you really have very little control on this cost.

Variable Cost ' Groceries, shopping, medicines, conveyance, entertainment, communication etc, expenses which do happen but are purely related to your habits and life style. You have very high degree of control on this cost.

Non-regular expense ' social, religious, banking charges etc, they constitute very little portion of your total expense. These are something we can call obligations. As human, we appreciate this expense but same time does not allow them to grow to large.

One Time expense ' Travel to home town or vacation, Capital expenditures like buying new sofa set or dining table etc, They are very rare but again can be controlled to a great degree.

Investment, insurance payment, loans etc can be easily planned if you have such detail of your expenses. I would suggest, especially to young couples that they maintain such records on daily basis. Start doing it today. If you have a computer at home, create excel file for each month, annual summary and income summary yearly. If you do not have computer, maintain a register (copy) of same.

If I and my wife can manage rising cost to a certain degree, I am sure you all to can.

Happy living