A Variable-Income Budget with a June Fee and a Friend's Chit Fund
The Deshmukhs live in a redeveloped chawl flat in Pune. Sanjay is a contract driver whose monthly take-home varies between ₹34,000 and ₹48,000; Sneha earns a steady ₹18,000 as a tailor. Monthly outgoings: ₹9,500 rent, ₹4,200 two-wheeler loan EMI with 18 months left, ₹3,000 electricity and water, ₹2,500 gas and transport, ₹6,000 groceries, ₹2,000 school fees, and ₹1,500 medicines for Sanjay's father. In addition, a ₹14,000 school admission fee is due in June, three months from now. They have ₹11,000 in savings and no emergency fund. Last Diwali they borrowed ₹25,000 from a neighbour interest-free and still feel obliged to repay. A friend is urging Sanjay to join a ₹5,000-per-month chit for 20 months to save for a new bike. Sneha wants to buy a ₹38,000 sewing machine on 12-month EMI.
1. Classify the Deshmukhs' expenses into fixed, flexible and irregular or lumpy items, then prepare a monthly budget using a conservative income figure. State the surplus or deficit and justify your income assumption.
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Use ₹52,000 as the planning income: Sanjay's lower figure of ₹34,000 plus Sneha's steady ₹18,000. A variable earner's budget should be built on the floor, not the average; the average can be used only after the floor budget is balanced.
Fixed: rent ₹9,500; loan EMI ₹4,200; medicines ₹1,500; school fees ₹2,000. Subtotal ₹17,200. Flexible: groceries ₹6,000; electricity and water ₹3,000; gas and transport ₹2,500. Subtotal ₹11,500. Irregular or lumpy: June admission fee ₹14,000 ÷ 3 = ₹4,667 per month; festival and emergency provision ₹3,000 per month; neighbour repayment - agree a fixed token, say ₹1,000 per month, rather than leaving it open.
Total commitments: ₹17,200 + ₹11,500 + ₹4,667 + ₹3,000 + ₹1,000 = ₹37,367. Surplus on the conservative income is about ₹14,600.
That surplus is not free spending money. It is the buffer that absorbs the months when Sanjay earns closer to ₹34,000 and the months when a lumpy cost arrives. If the family plans on ₹48,000 and Sanjay earns ₹34,000, the same budget produces a deficit of ₹9,400 - exactly the trap that variable-income households fall into. The surplus should first rebuild the ₹11,000 savings into an emergency fund of at least three months' essential expenses (roughly ₹86,000), then fund the June fee and the neighbour repayment.
2. Evaluate the chit fund proposal and the sewing-machine EMI. Which, if either, should the family commit to now? Use liquidity, commitment and opportunity cost in your reasoning.
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Neither commitment should be made now.
Chit fund: ₹5,000 for 20 months is a ₹1,00,000 commitment. It is illiquid - the money is locked into a group, and withdrawal or default carries penalties and social pressure. A chit is a rotating savings-and-credit arrangement, not a safe emergency fund; the family would be depending on the foreman's solvency and on other members paying on time. Saving for a bike also ranks below clearing the neighbour's loan and building an emergency reserve. The correct move is to decline politely and open a recurring deposit or a separate savings account with the same ₹5,000, which stays accessible.
Sewing-machine EMI: ₹38,000 over 12 months is roughly ₹3,200 a month before interest or processing fees. It adds a fixed obligation to a variable income and reduces the buffer exactly when the June fee and the repayment are due. The machine is justified only if it produces measurable income - for example, ₹4,000 or more of stitching work a month - not as a household convenience. If Sneha already has orders, a smaller second-hand machine or a repair of the existing one would meet the need at lower commitment.
Opportunity cost: every rupee committed to the chit or EMI cannot serve as the emergency fund. The family's real risk is a month of low driving income or a medical bill, and liquidity is what protects them. A defensible order is: emergency fund, June fee, neighbour repayment, then income-generating equipment.