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“Plan for the future because that’s where you are going to spend the rest of your life.”  Mark Twain

Budgeting is a crucial part of financial planning where projected income and expenses at various junctures are ascertained and balanced in order to achieve important financial goals. Budget is a careful earmarking of a portion of income to meet regular expenses. It also serves as an elaborate plan for saving to invest and borrowing to meet financial goals. Budgeting is an essential management tool in the construction of a financial plan, in its revision to modify existing goals and include more goals and also as a resource allocation and management tool.
The annual personal budget of post-tax income and expenses is an effective tool in financial planning. The past spending pattern and debt servicing schedule are required to have a tab on what is needed to be provided for consumption.
Added to this a one-time creation of contingency fund and a little scope for discretionary expenses, we arrive at a surplus in the budget which needs to be allocated to goal-based investments. Borrowing to meet basic expenses is a fractured proposition where a person is not initiated in financial planning.
Borrowing to meet discretionary expenses defies the discipline in financial planning. Once we have a basic financial plan constructed, the investment discipline is built in. To keep a proper control on the expenses, it is advisable to meet the investment regimen first as already decided in the financial plan, and spend the remaining part of the income. Spending is an art. We get experts to advise on what and where to invest. Spending in order to derive value from every rupee spent is a discipline which is inculcated the hard way, only with experience. The expenses can be fixed, variable, avoidable and essential.
Cutting across this nomenclature, two important categories of expenses are regular/irregular and discretionary/non-discretionary expenses.
These categories are also overlapping. The diagram on the facing page describes an interplay of these groups across major heads of expenses and guides how to distinguish them and thereby exercise due control over them.

Pattern of expenses
It can be seen that expenses covered in quadrants II & III are of essential nature giving us little choice for dropping or postponing them. Quadrant I expenses give us choice of quantum and time of such spends.
Quadrant IV has certain expenditure which financial planners scarcely recommend, though such expenses are not always unavoidable.
Such expenses should be incurred only when they enhance the performance of our professional jobs. Thus, having once partitioned our net income into investments and expenses, the expenses part should have a disciplined outgo towards quadrant II expenses. We should have a contingency fund built and supplemented at times to meet quadrant III expenses. A certain portion, say 5-10 percent of expenses part every month, should be set aside for discretionary expenses of quadrant I & IV.
Rather, a corpus for discretionary expenses should be built from the monthly budget and from such a corpus, first quadrant I and then quadrant IV expenses should be met. This will then give us a good mechanism to have control and discipline in our expenditure.
Investment planning is not about just quantum. It is more about a well-defined systematic approach in a strategic and sometimes managed asset allocation to achieve investment goals.
For financial goals of long term nature like distant education and marriage of kids and retirement, an asset allocation with more exposure to equity is preferable to effectively beat inflation and create wealth.
The equity returns in the short and medium term are volatile. However, over a longer duration of 7-15 years, volatility reduces and returns exceed 12 percent per annum. Thus, for goals maturing in 7-15 years’ horizon, one may take higher exposure of 60-80 percent to equities. Debt instruments provide stability to portfolio and generate regular returns and an exposure of 20-40 percent ensures the same. For goals maturing in the short to medium term, say 3-5 years, one may have larger portion of 60–70 percent in debt instruments and 30-40 percent in diversified equity.
There should be higher alertness and also proclivity to book profits and also to lock-in to gains from equity in the medium term goals.
It is further advisable to avail the services of a certified financial planner or CFP professional who, after scrutinizing the spending and saving habits of a household, orchestrates the same to suit financial goals and ascertains risk profile for optimum asset allocation to achieve the goals.

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Budgeting, Ranjeet S. Mudholkar