The Annual Budget –key lessons in financial planning

It was a proud moment for all Indians when a woman Finance minister arose in Parliament to present the annual budget for FY 2019-2020. Having already held the stellar position of Defence Minister in her previous term, this time Mrs NirmalaSitharaman was scripting history by planning the finances of a country of a billion people.

The annual budget is the most important macro-economic planning exercise for a country. It is the time when the various aspects of a country’s economy such as income through taxes, government expenditure, GDP growth, investments, debt, agricultural and industrial output andjobs data are presented. The actuals for the previous year and the forecast estimates for the next year are listed down.

The actual performance of the economy against the estimates made last year tell us whether the countryis growing in the right direction.If not, corrective measures need to be taken in the subsequent year. If the fiscal and current account deficit are under control and the inflation is within acceptable limits, then the economy is said to be stable. India is already among the fastest growing economies in the world. By taking the right steps, millions of our country’s poor can be pulled out of poverty.

There are several lessons that individual business owners and even home makers can learn from the country’s annual budgetary exercise. After all, the basic purpose is the same – to evaluate past financial performance and plan for future financial goals. Some of the key take-away’s are –

 #1 Set key financial goals, make clear plans to meet them–Expenditureis of 2 types, planned and unplanned. When analysed properly, we realize that it is possible to plan well in advance,for most of the expenses we are likely to incur. So setting aside funds for these expenses, whether in the short term or long term is possible through careful planning.

A business expense like an expansion plan or purchase of new machinery, or a household expense like your child’s education or property purchase – all these can be planned. Forecast the timelines and the estimate the amounts due. Then decide on the means for fulfilling the expense.

Build the corpus required well in advance. You might choose from several instruments – Government savings schemes, mutual funds, equity stocks, fixed deposits or chit fund schemes. Just like how the government estimates tax collection income and sets aside the expenditure amounts for various welfare schemes.

 #2 Boost your income, control the deficits – Good fiscal balance can be maintained in two ways – reduce your expenditure or improve your income.

Smart financial planning enables us to achieve both of these aspects. Apart from regular salaried or business income, we can target earning good returns from our investments too. By choosing the right instruments and carefully balancing our risks, we can make our money do the hard work for us!

However, focus only on the earning side is not enough. If we don’t cap our outflow, we could land up with deficits. Excessive use of credit cards, personal loans are examples of poor financial management. For instance, if you have a known expense coming up in a year’s time, it is foolish to borrow money to meet this expense. You will only incur huge EMIs at exorbitant rates of interest. Instead, set aside a fixed amount from your monthly income from now itself. By the end of the year, you already have the money required. No deficit, no loans!

Chit fund investments are useful in such scenarios. Put in your money in monthly tranches and withdraw a lump sum exactly when you need the money. With the added benefit of easy processingand flexible scheme plans.

#3 Take stock of your financial position periodically –Just like how the annual budgetary exercise is a great stock taking activity, businesses and households must also have periodic review of their financial status. List down your income and expenditures and see if they are as per your expectation. Identify risks or areas of concern and make contingency plans. Plan for long term goals.

Listed companies have a mandatory auditing exercise. However,smaller companies and proprietorships must also make this a regular practice.

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