I was on a flight while the union budget was being announced last week. The passenger in the next seat asked me, “You must be missing listening to it live? What do you think will happen?
We are all experts on the economy when it comes to budget time. Much TV time print space is spent on covering the union budget and consumers tend to spend hours reading, watching discussing it.
In my view, that time is better spent looking at your own budget.
What you need
Login to Internet banking and download your bank account’s transaction statement for the last year. Get your latest credit card statement. Also get any loan statements – car/bike, home or personal.
Figure out exactly how much you earn
Surprisingly, few people know exactly how much they earn. Over time, companies have become clever structuring salaries to show high “CTC”, but what you get in your bank account is the best indicator. Make sure you add the variable pay/bonus if your salary is structured like that.
Sum up the Credits column in your bank statement. That’s the amount of money you received in your bank account. Unless you were doing something quite crazy, that would also be your income for the year.
Figure out how much you invest
#1.Sum up the investments you made during the year. Your bank statement should help you here as well.
#2. Remember to add the investments you made for tax saving.
Figure out how much you spend
This is quite easy to do. Sum up the Debits column in your bank statement. Subtract this investments amount from this and that leaves you with expenses. No complex record keeping required.
Figure out how much you owe
Look at you credit card statement. Add the outstanding amounts from all loans except home loans.
Also, sum up the EMIs from all loans.
Questions to ask yourself
TV anchors ask some smart sounding questions to the experts and the finance minister. Here are some you should be asking yourself:
#1. Am I investing enough? If the amount is less than 20% of what you earn, there is a red flag
#2. Am I borrowing too much? If your EMIs exceed 50% of your monthly earning, you are in trouble. EMIs other than home loan should not exceed 20% of your earning. Think deeply about why you need to take a loan.
#3. Am I spending too much? If you don’t have loans and are investing at least 30% of your earnings, you’re good. If not, you should look deeper into your expenses.
#4. Am I earning enough? While the instinctive answer is always likely to be “No” in most cases, most people don’t spend enough time thinking about what they can do to earn more. And no, stock trading is not the solution. Skill enhancement
And, now your BIG policy decision
Do you want to have a solid financial position?
Hint: There is only one right answer.
This is one area where the Union budget does provide some learning for the individual. The Government of India today spends far more than it earns. In fact, it will borrow Rs 19 lakh crore this year, of which Rs 18 lakh crore will go just in paying interest on its previous loans. You, as an individual, never want to be in such a situation.
Plan to spend less than you earn; save at least 20% of your salary; and take a loan only for creating income generating assets.
Just the policy decision is not enough
To follow through on this policy decision you need a financial plan. Here’s a simple one for you to get started with.
Note: What I’ve listed above applies mostly to people in their thirties and above. As a young earner, you don’t even need to do all this. You have the advantage of a clean slate and you can jump straight to your policy decision.