Weekend Bytes
Navigating Financial Success: The Crucial Role of a Household Budget.
Let’s Understand her Budget and Investment approach.
> Preparing a well-structured Budget
Shruti’s Income is Rs 50,000 Per month. Implementing a systematic Budget, she allocates 50% (Rs 25,000) to her Needs – Covering rent, groceries, utilities and transportation. This ensures that her fundamental needs are met without causing financial strain. She designates 30% of her Income (15,000) for wants like dining out, Gym membership, Travel, entertainment and non-essential purchases, allowing her to enjoy life without compromising her financial stability. The remaining 20% (10,000) is set aside for savings and investments.
Within the 50/30/20 rule Shruti also follows mental budgeting approach which involves managing her finance without strict formal tracking on the Individual Budget Categories. For example, setting spending limits for categories like groceries or entertainment in her mind and making decisions based on those limits.
> Understanding the 50/30/20 Rule
U.S. Sen. Elizabeth Warren popularized the 50/30/20 budget rule in her book, All Your Worth: The Ultimate Lifetime Money Plan. The rule is very simple in practice. It asks you to break your in-hand income into three parts. 50% of the income goes to needs, 30% for wants and 20% to savings and investing. In this way, you will have set buckets for everything and operate within the permissible amount for each bucket. This will inculcate a sense of discipline at the same time ensuring you neither compromise on the quality of living nor planning for your long-term goals. Now that the rule is clear, let’s see how to categorize your spending buckets into needs, wants and savings. Worth noting that in the absence of social security benefits comparable to western countries, Indians may need to save and invest a larger portion of their income.
> Investing regularly
Shruti recognizes the importance of prudent savings and investments. Her decision to allocate 20% of her monthly income to savings and investments paved the way for her journey to invest in mutual funds.
Before starting her investments, she classified her Financial goals into short, medium, and long-term goals. Whether it’s buying a home, going on a vacation, buying a new car or preparing for retirement, she classified them as short, medium or long-term to determine the appropriate mutual fund schemes. Understanding the benefits of diversification, she sought funds across asset classes like Equity and Debt to meet different financial goals.
Exploring Mutual Fund Schemes:
1. For long term wealth creation, for goals with a longer time horizon she opted for Equity funds, like HDFC Flexi cap Fund
2. For Short-term goals which aims to provide Stable returns and to create an emergency fund she opted for Debt funds, like HDFC Short Term Debt Fund
3. For retirement goal she decided to invest in Retiremsent Oriented Funds as they are designed to help to achieve retirement goals, like HDFC Retirement Savings Fund
Shruti felt a sense of empowerment and financial security. The decision to invest her 20% Savings in Mutual Funds not only aligned with the 50/30/20 rule but also became a foundation of her strategy for building long term wealth.
Together, Budgeting and Mutual Fund investing can emerge as a powerful combination as it not only instills financial discipline and mindful spending but can also play a pivotal role in helping one achieve their goals.
Disclaimer: SHRUTI IS A FICTITIOUS CHARACTER, THERE IS NO RESEMBLANCE TO ANY PERSON. THE INFORMATION CONTAINED IN THIS DOCUMENT IS FOR GENERAL PURPOSES ONLY AND NOT AN INVESTMENT ADVICE. READERS SHOULD SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY INVESTMENT RELATED DECISIONS.
