Friday, November 25, 2011

Your expenses should not exceed one-third of your net income :

The art of spending is all about getting the right value for every rupee spent and making appropriate decisions on the mode of transactions - cash, cheque, credit card or equated monthly instalments (EMIs) - that will help us meet all spending needs with ease and comfort.

Making a family budget for spending, including regular spends, nonrecurring, one-time expenditure and even discretionary spends, is a way to be never out of money and save enough for financial and other goals. The budget of one person may vary drastically from another's despite having similar cash flows, since the budget would reflect our habits and aspirations. It is best to customise our spending categories based on past experiences and have well-defined financial goals, both short-term and long term.

Regular & amp; Non-Discretionary Expenses

These include expenses on grocery, electricity, power, fuel and communication, laundry, domestic help, eating in restaurants and entertainment. These being regular, unavoidable expenses, it is better to fix a broad limit so that they do not go out of control. In addition, making bulk purchases with friends and relatives may collectively help avail of good discounts as well. Ideally, the right mode for such transactions should be cash, debit card and/or credit card (only for the credit-free period).

Irregular & amp; Discretionary Expenses

These include buying furniture and other consumer durables, building assets like gold or other valuables, etc, or planning a holiday. Since these expenses call for a large sum, we need to intelligently plan for them. For example, when we decide to buy furniture for our home, we must carry out a price-value analysis to determine the appropriate quality and location from where to buy. While deciding the same, we also need to keep in mind our financial planning and budgeting. These days, various payment options and benefits are available, such as cash discount, zero-interest EMIs, etc.

In case of EMI payment, when the seller of the product offers zero interest EMI, we must compute its cost effectiveness by taking into account the hidden costs. The right mode for this should be monies from planned budget, which may be from an invested corpus. Credit cards may be used only as a mode rather than as an asset for finance. Impulse buying of expensive items from the budget on account of 'sale', 'discount', etc, should be a strict 'no'. In addition, while taking a loan, we need to decide if that would be wise decision by considering the landed cost to us in terms of the annual effective rate of interest. We can very well arrange the money at a much lower cost to make a cash down payment while availing of the cash discount as well. Negotiation plays a very important role in saving costs and getting the best deal in the market. We should not hesitate to ask for complimentary products or services.

For instance, we can negotiate for a room tariff in case of hotel booking or ask for complimentary services like added breakfast, lunches/dinners (MAP/AP Plans), airport pick-up and drop services, etc. As per government regulations, consumers have the right to demand discount on the maximum retail price (MRP) printed on the product. We can also get very good deals at affordable prices from online shopping sites. We can easily compare the rates of various products and services and choose the best option.

Some times, we get huge discounts and other complimentary gifts as well. For eg, if we want to buy books, we can visit,, ,, etc, and look for the best deal. We can also rent flats or buy/sell other assets using internet and save brokerage charges, which can be pretty high. Services of professionals like real estate brokers, lawyers may still be required for documentation, references, etc.

However, this would certainly help reduce the expenses to a very large extent. It is important that income be judiciously allocated between the present and the future spends. For the future, we should save and invest wisely as per our risk appetite. For the current expenses, we should be well budgeted to be able to meet all the requisite expenses. Thus, to conclude , we may say that no more than one-third of our net income should be used to service debts, and our savings should be at least one-third of our net income. Accordingly, our expenses should not exceed one-third of our net income in principle.

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