- Estimating funds available for spending:
All sources of current income should be considered. They include wages, salaries, social security benefits or pensions, interest on savings accounts, dividends from stocks, rents etc. Funds from all sources of current income should be totaled to give the amount available for the budget period. If much fluctuation is expected, a range of high and low may be calculated. If large amounts of income are expected at irregular intervals, note should be made of the amounts and when they are expected. If reserves/ savings are to be used, it is better to be used for the specific purpose for which they were set aside. Since it is family income, the earnings of all members of the family should be considered.
The family must decide whether to buy things on credit. Using credit makes future income available for current expenditure. If families consider the use of credit as a part of their total spending plan, it should recognize the cost of credit, and consciously choose this alternatives otherwise it may find itself in trouble because of credit.
The income from both assured sources and expected possible income should be taken into consideration while estimating the family income. Assured income is one, which a family is one that is not sure of time when exactly it will be received.
- Estimating expenditures:
While estimating the expenditure, classification or categorization of the items should be made. This reduces the probability of one’s overlooking important areas. This classification helps to meet the family needs. Gross and Crandall (1980) have given the following classification of estimates of expenditure.
- Set aside for future long-term goals such as the development of human capital and possible emergencies
- Set- aside for this year’s fixed commitments and large irregular expenses
- Sums for past-due bills and debts
- Regular monthly and weekly needs such as food, automobile upkeep, personal allowances and household supplies.
- Miscellaneous including reading, entertainment.
Once classifications and a general listing of the items involved are established, the family members must estimate the cost. Estimates of past expenditure may be helpful for better results. Since the costs are being estimated in advance, general price trends and economic conditions must be considered.
One of the important causes of failure is the underestimation of cost. At every stage of the life cycle 0r under changing circumstances new demands upon money are likely to occur and the effects of these changes must be calculated. One should also see that general business trends are considered in making these estimates. For example, if prices are showing an upward trend, sufficient allowance should be allowed to cover such increases. One can find out the costs accurately by the following means
- The most satisfactory source of information on costs is the market itself and it is helpful if sufficient time can be allowed during the planning stage to shop around and see what quality is available at what price.
- While the investigation of costs may seem very tedious, this task may be simplified by delegating parts of the investigations to different family members according to their abilities and skills. For example, mother may be a better judge for clothing and textiles while the father can determine the cost of education or buying property
- Books, magazines and other media can also be used to find the cost.
- Friends, relatives and neighbours can also help in this regard.
- Comparing requirements and resource:
After totaling of all estimates costs comes the task of bringing estimated expenditure and income into line. The needs and desired goods and services ordinarily add up to more than the available income. In such cases the family can either increase the income or cut the expenditure or do some of both to bring the expenditure and income into balance.
To increase the family income some members may take an additional work or part time jobs or if self employed increase the production or may change the investment9fund) to other pattern for greater returns. It is probably at the point of balancing the family will decide whether or not to use credit. It is important to note always available. Some times the family may need to sacrifice future goals temporarily.
There are several possible approaches to cutting expenditures. The first is trimming the flexible expenditures. Secondly certain items may be completely eliminated. Eliminating one or two expensive but not necessary items such as a vacation tour may balance the budget. The important point to remember is that so far as possible the cuts are made in such a way as to retain the commodities and services which are of great important to family members. The budget cannot be considered as balanced, until the proposed expenditures and savings are mathematically equal to the anticipated income.
- Reviewing the plan as a whole:
This step is very important in making the successful budget plan. The plan should be reviewed in light of the needs of the family as a whole, needs of individual members of the family, possible emergencies and the long term goals. The reviewing helps the family to visualize the kind of life it is going to buy and resulting satisfactions.
It is impossible to foresee all demands. Therefore the budget should allow for forgotten items and emergencies. Timing of major purchases should be arranged so that sufficient funds have accumulated.
The basic rules that every family should adopt for budgeting are
- Set the goals and
- Workout a financial plan to meet these goals.
Families differ in their values and the related goals. Some families will value financial security, while others may value social status. The former will have goals such as accumulation of physical assets and liquid assets whereas the latter will have as their goal, acquisition and exhibition of status-symbol items like having more than one car, several servants etc. These naturally influence the pattern of income and expenditure.
For a family whose income is between 1200 and 1600 the budgeted amount under the various heads could be as follows:
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