Jan 24, 2020

How to reduce expenses through Home Budget Planning


As I mentioned in an earlier post, "Lifestyle" is a topic I wanted to write more about. The lifestyle we choose dictates multiple areas of our lives - our health, our food choices, clothing, weekend activities, our hobbies, where we live, where we work, how long we work, what BS are we ready to tolerate etc.  In the Tamil movie "Velaikkaaran" (Sivakarthikeyan one), there is an amazing scene where the hero would wonder how the expenses of his family have suddenly increased ever since his income increased. The following scenes where a salesman sells a stabilizer for an LED TV and how the hero thinks about past conversations about our mindsets are just brilliant. Here's that particular scene if you haven't watched it. What I'm trying to convey here is well narrated in this scene.

The rigor with which we focus on increasing our income is so high, but most of the middle and upper-middle-class families don't seem to have the same rigor when it comes to reducing expenses. I'm saying this, purely out of my observations. I'd be so glad if this wasn't the case.

Financial planners and personal finance-related thought leaders even go to the extent of saying "Stop thinking about expenses, think about investments". Choosing the right Investment portfolio is extremely important for securing our future, but at the same time, our future lifestyle depends on our present choices. I heard this quote many years back and has stuck with me - 
"Luxury once sampled becomes a necessity".

My point is that if we put some thought into what our current lifestyle is and how our expenses add up, we can plan out a strategy to cut down our expenses so that we can make better choices in terms of our job/career/life in general.

Do we really need Netflix?
Do we really need to take Uber/Ola every single day?
Do we really need to have that fancy meal costing Rs.2000 per person?
Do we really need expensive branded clothing to show who we are?

Only when we are aware of our monthly expenses, we can ask such questions and decide for ourselves. Given the numerous temptations, sales and discount offers running almost every week on every single e-commerce app, we can easily succumb to such deals on things we don't really need. And as our expenses keep rising, we try to increase our income, fight for that pay raise/promotion, accept all possible ridiculous work hours, take loads of stress etc.

Let's assume, you are convinced with my rationale so far and want to reduce your expenses. Here's a plan I suggest:


  1. Open a Google spreadsheet or excel. List down the broad categories of expenses. Add/update the categories listed below as per your family's requirements. Once you have listed them down, mark each of them under two categories - Fixed (F) and Variable (V)
    1. Annual
      1. Term Life Insurance Premium (F)
      2. Medical Insurance Premium (F)
      3. School Fees (F) 
      4. Car Insurance Premium (F)
      5. Locker Rent (F)
      6. Streaming services (Amazon Prime/Hotstar) (F)
    2. Monthly
      1. House rent (F)
      2. Maintenance (F)
      3. Electricity Bill (V)
      4. Water Bill (V)
      5. Househelp / Maid salary (F)
      6. Cook salary (F)
      7. Internet Bill (F)
      8. Mobile Bill (F)
      9. Landline Bill (F)
      10. DTH Connection (F)
      11. Streaming services (Netflix, Google music etc) (F)
      12. Milk (V)
      13. Newspaper (F)
      14. Groceries (V)
      15. Fruits & Vegetables (V)
      16. Eating Out (restaurants/order-ins) (V)
      17. Car cleaning service (F)
      18. Fuel charges (V)
      19. Commute expenses (Ola/Uber) (V)
      20. Gym membership / Yoga classes (F)
      21. Library subscription (F)
      22. Entertainment (movies, events) (V)
      23. Household item purchases (V)
      24. Personal care purchases (clothing, shoes, accessories) (V)
  2. Sit down with your spouse, look through past 6-month or 12-month credit card statements and other bills. Add approximate values for each month under the identified categories. Don't worry if you don't have the exact numbers. It is okay to start with some approximate figures for now.
  3. For those listed under the variable category, take an average of 6-month/12-month values. For eg, your monthly groceries average to around Rs.8000. Eating out expenses average to around Rs.5000 etc.

  4. Create another worksheet for Budget Planning - Variable Expenses.  Copy the expenses analysis sheet with ONLY the variable categories and the average values calculated. So now you have all the variable expense headers and the average values for the past 6/12 months.
  5. For the next month (say Feb 2020), think of a plan on which categories you can possibly reduce your expenses and how much you can reduce it. For eg, if your eating out expenses average is Rs.5000, see if you can bring it down to Rs.4000 in Feb 2020. Do this exercise for all variable categories and commit to a number before the beginning of the month. That's your Feb variable expenses budget.
  6. Collate all the daily cash expenses quickly in a notepad or an app. Once every week, sit down, look through your credit card transactions, cash expenses and update the expenses incurred under each category. For eg, the Budget for eating out expenses is set to Rs.4000. At the end of Week 1, you realize you have already spent Rs.2000. For the next 3 weeks, you would be more careful in not exceeding the remaining Rs.2000. 
  7. Do this work diligently every week. It doesn't take a lot of time if most of your transactions are via credit card. 
  8. At the end of the month, see if you have remained within the budget or exceeded the budget. If you have exceeded, identify the categories where you have exceeded the most. If required, adjust the budget to a reasonable limit for the subsequent month.
  9. Repeat steps 5 to 8 every month. Set a budget/spending limit for each variable category, track your expenses and analyze how the expenses fared at the end of the month.
  10. Regarding fixed expenses, for some categories, it is a binary decision. Should we need it or not? For eg, we decided to stop buying newspapers. So that category is no longer relevant to us. We take a monthly subscription for Netflix and renew it for a month once every 3 months. From my personal experience, it is easier to cut down variable expenses THAN fixed expenses.
Hope this approach is helpful to some of you. 

Many financial planners compute retirement corpus based on your current monthly expenses and then using inflation as a measure, they forecast a lumpsum amount needed by the time you turn 60. When I went to a personal finance workshop, the amount predicted by the instructors was a huge figure. They then go onto share about how much our income levels need to rise to save this amount. I felt quite perplexed at the end of the workshop. If our monthly expenditure is the key factor that determines this retirement corpus, why not simply reduce this value, keep our needs simple and not spend on extravagant/unnecessary stuff?



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