general about finance plan

7/27/2019 General About Finance Plan

1/5

Module 1 Introduction to Personal Finance 1

Personal Finance and Money Management(Basics of Savings, Loans, Insurance and Investments)

------------------------------------------------------------------------------------

Module 1 Topic-4------------------------------------------------------------------------------------

1.4. Budgeting


2/5


3/5


LoansThisis also an important part of your budgeting exercise as it tell you how much money you

have to return to your lender. Ideally, you should have a clear plan for repaying your loans.

This means you must be clear about how much you plan to pay back and at what time

schedule.

These four pillars of a budget help you to monitor your spending and control it, if necessary.

More importantly, they allow you to plan how to save and invest for goals.

1.4.2 How to budgetIn the days gone by, it was believed that budgeting was an exercise that followed the

following procedure:

People used to spend money on various household and other requirements and save whatever

was left. Then, they would wait till the money saved every month reached a good enough

amount. They would take that amount and save it in the most attractive investment product

available at that time.

But now financial expertshave come to the conclusion that we must first set aside a fixedamount of savings. These savings must be immediately invested as per a plan. This plan must

be created on the basis of our short term and long term goals. Then we can spend whatever

we are left with, which is usually around 70-80% of our regular income. This puts your goals

as your priority and ensures that you spend in a disciplined manner.

1.4.3 Meeting emergencies

Life is never predictable. Today, everything seems to be going as planned and suddenly

tomorrow, something unpredictable happens and changes the very basis of your plans. And

when this happens, how does it affect a budget? More importantly, how does it affect your

ability to meet your goals?

Minus Equals

Minus Equals


4/5


For instance, consider the case of Dinesh and Meera. This young couple live alone in a small

city away from their hometown. Dinesh works in a mid-sized company as an accountant and

Meera is a housewife. They have no children yet.

Dineshs parents live in their ancestral house in their hometown. His father is a retired

government officer. They have always lived a humble life. They never had any seriousfinancial problems and always lived comfortably but they never owned their own vehicle or

went on expensive holidays or spent on grand celebrations.

Their 25th wedding anniversary is fast approaching. Dinesh and Meera want to surprise them

by gifting them a Nano car. The young couple are well aware of the process of financial

planning and how it can take them closer to their goals. As a result, they have been saving up

for the past 3 years and investing regularly in a recurring deposit. The deposit will mature

about 6 monthsbefore Dineshs parents anniversary and give them a total amount ofRs. 1.5

lakh.

All of a sudden, they receive a call from Dineshs mother telling them that papa has had astroke and although he seems fine now, he has been advised to do an angiographya test to

check whether he has any blocked arteries. Dinesh and Meera insist that the parents come to

stay with them in the city and get the test done there. It turns out that Dineshs father has a

block and the doctor performs a successful angioplasty (procedure to remove the block) on

him.

Dineshs father has health insurance. However, it was not enough to cover the cost of the

treatment in the city. Dinesh pays for the balance of the treatment from the money he had

saved up to buy his parents the car. Meera and he decide that they were lucky that they had

saved up enough to pay for the treatment or else perhaps they may have had to take a loan.

They also assure each other that they will start saving again and buy that car for their parents

a couple of years from now.

The lessons from this little case are:

1. Financial planning does not need to be discarded in an emergency; it must becarefully altered to suit the situation. Later it can be set back on track for the same

goals.

2. Always set aside some money for emergencies; one can never tell when they will popup. The best way to plan for emergencies is to ensure that the family has adequate

health insurance and the main earning member has enough life insuranceAlways purchase adequate insurance, especially health and accident insurance. For a small

payment every year, you can protect yourself from a situation where in a trip to the hospital

upsets all your carefully planned finances.

1.4.4 Dealing with a money/ debt crisis or financial emergencyQuite often, a family can be burdened with loans that remain unpaid from year to year. The

interest on such loans keeps increasing, despite the familys efforts to repay them. At such

times, budgeting for the loan should become the focus of a family budget. Here are some

steps that can be followed:


5/5


1. Transfer your debt to a lender who charges a lower rate of interest :Sometimes, as in the case of Arvind, people borrow from money lenders, who

charge a very high rate of interest. When they are unable to pay back the amount

with interest, within the specified period, the period is extended. But with increase

in tenure, you also end up paying a much larger amount as interest. The familykeeps struggling to pay off the interest component and never manage to pay off

the actual loan. In such cases, you must find out if a micro-finance institution or

bank in your neighbourhood is ready to give you a loan that equals what you owe

the money lender. Even if they are willing to give you part of the amount, you

will be partially free of the moneylenders loan.

2. Pay off your higher interest loans first: If you are not able to pay all your loansback at the same time, pay off those which have a higher rate of interest on them.

This will reduce the overall amount that you have to pay.

3. Make a very strict budget for yourself and your family: Nobody likes to livewith loans. Try to first pay out at least 30 per cent of your income towards

repaying your loans, or more if possible. Then, use the rest on your house holdexpenses. Within household expenses, list out those that are necessary (food and

education, etc.) and those that you and your family can do without, such as

entertainment and spending on festivals and guests. Then try to do without the

latter until your loans are paid off.

The rule to maintain while budgeting is that you and your family should ensure that all your

loans do not amount to more than 1 and a half years income. Also ensure that all your

payments towards your loan (interest and repayment) do not amount to more than 40% of

your monthly income. Of course these are outer limits and you should try to stay well within

them. The best precaution would be to save for your goals instead of buying them on loans.

1.4 Summary

Creating a budget is based on four main exercises:o Finding out how much money is coming from different sourceso You need to figure out how much you spend on an average each month.o Taking stock of how much wealth you have collected over the yearso Finding out how much debt you have and whether you need to borrow.

The principle behind budgeting has changed over the years. Before people would firstspend from what they earn and then save. Now we are advised to first save from what we

earn and then spend.

Financial planning does not need to be discarded in an emergency; it must be carefullyaltered to suit the situation. Later it can be set back on track for the same goals. Always set aside some money for emergencies; one can never tell when they will pop up.

The best way to plan for emergencies is to ensure that the family has adequate health

insurance and the main earning member has enough life insurance

When a family is faced with a debt crisis, some measures that can be considered are:o Find out if you can transfer your debt to a lender who charges you a lower rate

of interest

o Pay off your higher interest loans firsto Make a very strict budget for yourself and your family

general about finance plan

Documents