Budgeting and Savings
A budget is a written plan for using expected income to meet family goals. The exam tests budget types, steps, fixed and flexible expenses, Engel's laws and saving options.
Core concepts
- Types: balanced (income equals expenditure), surplus, deficit, long-term, short-term, fixed and flexible.
- Steps: set goals, estimate income, list fixed expenses such as rent, insurance and loan instalments, estimate flexible expenses such as food, clothing and recreation, allocate, record actual spending, compare and revise.
- Principles: live within income, save first, spend later, keep an emergency fund, involve the family and review monthly.
- Engel's laws: as income rises, the percentage spent on food falls, while the percentage spent on clothing, housing, education, health and recreation rises. The absolute amount spent on food may still increase.
- Savings: bank savings and recurring deposits, post office schemes, PPF, insurance, gold and self-help groups. Keep three to six months' expenses as an emergency fund.
Worked example
Monthly income is ₹30,000. Fixed costs are rent ₹6,000 and insurance ₹1,500. Flexible costs are food ₹9,000, transport ₹2,000, electricity ₹1,500, clothing ₹1,500 and recreation ₹1,000. Savings are ₹7,000 and contingency is ₹500. The total is ₹30,000. The reasoning is that fixed costs are committed, so savings is treated as a fixed line and not as the leftover.
Traps
Budgeting only expenses; calling food a fixed expense; ignoring annual or irregular costs; saying savings are whatever remains; misquoting Engel's law as food spending falling in absolute terms.