Most of us know how much money we make but very few can tell how much we spend and where we spend more. It’s very important to take a hard look at your finances and expenditure. You may think you have no cash to invest, but chances are, you can find some just by making a few lifestyle changes.let us see how to analyse income Vs. expense.
We spend 20-30 minutes first thing in the morning checking our smartphone for Whatsapp, Facebook and emails, instead of doing exercise (Remember old saying “Health is your Wealth”). We will browse on Facebook and Twitter for liking the latest post or pictures instead of doing some financial planning and finding what actions I should take to reach my financial goal. We don’t change our habits so they no longer leave us about to go to bed and wondering where the day went; instead, we tend to cry that we simply don’t have any time at all to look towards my financial health.
Tracking your income is the easy part. It’s much tough to identify your spending. Write down your income source like Salary/ Business income and other income like Dividend, Interest earned on Fix deposits or recurring deposits etc. And income earned per month on the notebook.
Second step is to organize into spending categories. Break them down into following five categories.
- Fixed Expenses
- Variable Expenses
- Optional Expenses
When you have all your expenses categorized, it will be easier to see how you can control your spending.
Fixed expenses are those expenses that stay the same every month. It is going to be different for each one of us, but here are a some of the most common like,
- Home Loan EMI /Rent
- Insurance (Life / Non-Life)
- Vehicle Loan EMI
- School Fees of Children
- Membership fees for Gym/Magazines
While these expenses may be compulsory, like rent or EMI payments, they often can be scaled down. If your rent is more than you can afford, you might have to move to a smaller place or get a paying guest. Or perhaps you could transfer your Home loan for a lower interest rate (be sure to consider the expenses involved in transfer before deciding to go ahead).
Let’s take a look at the Variable expenses, as the name suggests it is a wide category that includes every expense that changes each month. Planning for variable expenses is not as easy as budgeting for savings or fixed expenses. Variable expenses will fluctuate by household situation, time of year, health, economic conditions, and a variety of other factors.
- Monthly Ration / Food expense
- Utilities Bill like Electricity, Mobile bill, Broadband.
- Furniture and appliances
- Petrol/Diesel and commuting costs
- Medical care
- Fees paid to accountants, lawyers, and other professionals
It’s probably easier to cut back on variable expenses such as these than on fixed expenses. Utility bills can be adjusted to save money. (Check your broadband plan offering and your usage, use coupons during online purchase) After you break down your expenses into variable or fixed, you can add another category, Optional or Compulsory.
Compulsory expenses are things you must pay for or buy, including the following;
- Home loan EMI/Rent
- Car Loan payments
- Utility bills
Compulsory expenses can’t be avoided, but you might be able to control them, as discussed earlier.
Optional expenses, on the other hand, are those that aren’t necessary, including the following;
- Furniture and appliances
- Club memberships
These optional expenses are the most obvious ones to curtail if you’re trying to cut back on expenses.
Basically, there are two ways to use this information to save money: You can control your optional expenses (skip the vacation this year), or limit your compulsory expenses (move into a smaller apartment, use staff bus provided by your company).
Spending Ratio: When it comes to figuring out where you need to cut expenses, you’ll find spending ratios to be useful tools. A spending ratio is simply the percentage of money, as it relates to your gross income, that you use for a particular area, such as housing or entertainment. If one area of expense becomes too great, you’ll see that ratio is too high and begin to cut back.
Maintain and monitor monthly budget sheet to figure out your housing payment ratio, which is one kind of spending ratio; add up all your housing costs (rent or EMI, insurance, property taxes, and so on). Compare that number to your total income. If your housing costs are more than 30-35 percent of your gross income, you’re paying too much for housing and should look for ways to cut your costs. Same way sums up all your investments and compare this number with your income, it must be more than 25-30 Percent of your gross income. If it is less you should look for the ways to improve your overall saving ratio.
This ration is not common for all, one should consider all the income, Expenses and liabilities.
“Spending ratios are used to determine the amount of your gross income that goes toward a particular expenditure area. They can be used as tools in cutting expenses. Your savings ratio is the opposite of your spending ratio. It is the percentage of your gross income that you are able to save within a given time.”
Budgeting of income varies with the individual. But in general, you should match below ratio in order to improve your overall personal finance.
- Maximum 70% allocation of your net income towards your expenses,
- Allocate balance 30% towards savings for your retirement, contingencies.
Allocate no more than 50% to needs, including housing, transportation, groceries, insurance, and a basic life requirements. Spend up to 20% on wants like a new Mobile or Tablet, cable TV, clothing beyond the basics, dining out, Party or movie tickets, books and so on. Set aside at least 30% for savings, including paying off debt.
Tax is the category that makes us the most uncomfortable and, for most people, an automatic deduction. If you are self-employment, tax management is an even more critical aspect of planning. Check your Form 16 or 26 A, see the deduction happened due to your laziness. Plan your investment in suitable tax saving component based on your future goal and liquidity requirements.
Savings is the last component in the cash flow puzzle. Do you save regularly and systematically or do you save when there’s something left over? Savings are our opportunity to capture and secure our wealth. The better choices you make in the other categories, the more wealth and security derived.