Don't ignore the red flags in your budget

Well, it is not as though you cannot afford it but these unplanned expenditures do come up too often and need financial planning. 

 

Plan for the unplanned

With some fore-thought even the unplanned can be planned for. Most unplanned expenditure can be divided in three categories.

 

Monthly expenditure

The problem: Regular spending for which you do not really account for is monthly unplanned expenditure. Buy a cup of coffee an the go, spend some money on a taxi fare, buy tickets for a movie, have a hair cut, all these are small impulse purchase for which you pay out of the cash in your pocket. Explains financial planner Gaurav Mashruwala, “There are cash purchases for which you never take a bill and do not account in your budget.” Though small expenses they go unaccounted for and at the end of the month you are wondering where did you spend the extra Rs.2,000/-

The solution: Quite simply, create a separate category of expenditure for it in your budget and allot 2.5%-5% of your monthly budget to these out of pocket expenses. Do not give it a rigid accounting standard. Just like going on a very strict diet does not work, so also accounting for smaller cash expenses should have been flexible.

 

Annual Expenditure

The problem:  Your annual budget is not the monthly budget multiplies by 12. There are several expenses you have either every few months or once a year. These are not taken into account in a monthly budget. Car repair, dental expenses (which no medical insurance covers), Children’s picnics and field trips, gifts for marriages etc., medical expenses which you policy does not cover, donations ….the list can go on. These are expenses that are not really unexpected but still go unplanned because they are non-recurring in nature.

The Solution: Annual expenses absolutely need to be accounted in. Most of them are fairly large. Annual expenses, if divided over the year increase your monthly budget by 10-15%. So if your monthly expense estimation is Rs.30,000/- then you can add atleast another 3,000/- per month to arrive at a more realistic estimate. It is best to keep aside the money each month so as to not feel the crunch at a particularly heavy spending period for example during festivals or the tax paying months. Incase the money goes unspent at the end of the year you can always invest it or buy that Ipod you wanted or still better buy your wife a pair of diamond earrings and get a few months of peace.

 

Unexpected Expenditure

The problem: You’re on a roll. Things are humming at work. Your home has never looked so good. And then bang — it happens. Your maiden aunt who does not have an insurance policy has a bad fall and the burden of the hospital expenses which are a whooping Rs.85,000/- fall on your shoulders. All this when you have just brought the Plasma Television (worth Rs. 1.60 lacs) you have been having dreams about.

 

Sanjay Matai, says,” Medical Expenses, emergency travel, equipment breakdown are the most common unexpected expenses that bogs us down.” These are expenses that are huge and throw not only your budget but also your saving plan out of gear. Even the best planned amongst us are often at a loss about gaining back the ground lost due to unexpected expenditures.

 

The Solution: The solution to unexpected expenses is to create a buffer zone of liquidity. When one needs cash in a hurry then one tends to borrow money against our credit card or take a personal loan. Credit card companies are charging 40% per annum on carry forward amounts; it certainly increases your burden. Money is not always easily available with friends and family.

Financial advisors tell us to create an emergency fund. This fund should be untouchable. Keep some cash available at home as well as some in a saving account. Around 4-5 months worth of salary is a safe amount in this fund. It may mean some money lying idle but an emergency fund is a necessity. Such a fund will enable you to meet these expenses without breaking into your investments.  Not only will you cut down losses made by early cashing in on investment but also it is cash readily available.