Applying the Union budget framework to your personal finances

An interim budget or vote on account, as is the norm in an election year, will be presented on Thursday. Essentially, the Union budget has a detailed breakdown of the government’s income and expenses from multiple sources and also tries to look at how these incomes can be used for both routine expenses as well as developmental expenses that can provide multi-year benefits. This is an excellent way for you to look at your family’s financial planning as well.

Your estimated sources of income for the family, which is where your rupee comes from, could include the following:

Professional, salary or business income that comes to you on a monthly basis; bonuses or variable compensation that you receive, which could be less predictable than your main income and may come to you annually or quarterly depending on how it is structured. This could come to you in the form of cash or stock options; interest income from your deposits and bank accounts; capital gains income from your investments, including in mutual funds; rental income from any residential or commercial real estate that you own; dividend income from stocks; and miscellaneous income or other sources of income from teaching, consulting, royalty, etc.

It is important to estimate growth rates on these incomes during the year and also factor in possible events that could temporarily disrupt these incomes—for example, a sabbatical from work for a partner or an upcoming lease renewal that could mean rental income stops for a few months as you seek a new tenant, etc. For items like variable income, it is also a good idea to be conservative as you may end up getting less than what you had imagined.

Your estimated expenses for the family, which is where your rupee goes, could include the following:

Taxes: these could include direct taxes on your professional income, capital gains tax, income from house property, and taxes on other income, which could be at different rates of tax. These could also include indirect taxes like goods and service tax that you pay on products and services that you use, or customs duties that you may incur on certain items when you bring them into the country when you travel overseas.

Interest: these could be costs incurred on loans that you may have, on your home or your car or a personal loan or credit card or an education loan for your child. Do remember to separate the interest component of the equated monthly instalment (EMI) in the loan component, as only a part of the EMI is going towards an interest payment, and the rest is going towards principal reduction.

Revenue expenditure: just like the government has expenses like salaries and other costs that allow it to run on a daily basis, your revenue expenses could include day-to-day living expenses like rent, groceries, utility bill payments, domestic help and support costs, and commuting costs, among others. Do not forget to include lumpy expenses that may not come in each month, but are routine expenses nevertheless like school fees, doctor fees, medical costs, clothes and wellness expenses. Do not forget to add domestic or international travel costs in this pool of expenses.

Capital expenditure: these could include upgrading your child’s laptop, your washing machine, your car every few years, etc . It is very critical to include development expenditure in this bucket like upgrading professional skills to keep you at the cutting edge of your profession.

A good way to estimate these expenses is to look at your credit card and bank statements carefully for the last two years. Additionally, there is a need to account for inflation on these expenses, which considering the country’s targeted range of 4%+-2% for consumer inflation, could be estimated at 6% per annum for a large portion of your expenses. Do remember that you will also be exposed to lifestyle inflation on some items, ie upgrades which are higher than normal inflation.

It is crucial to keep your deficits under control, that is, the difference between your income and your expenses so that you can save and invest towards your long-term goals like retirement, and education for the children, among others. Additionally, deficits are often needed to be supported by borrowings, which can damage your long-term finances.

Even as you watch out for the interim budget announcements this week and track any changes that are getting announced, I encourage you to use the budget framework for your personal finances, to open the doors of Amrit Kaal to realize the vision you have for yourself and your family’s future in 2047.

Vishal Dhawan is the founder and CEO of Plan Ahead Wealth Advisors, a Sebi-registered investment advisery firm.