Budgeting- How it helps in Investment Planning

Rajat is a 27-year-old working professional. He earns a decent salary every month but is not sure where his money goes. And due to this, he is not able to save much. We are sure you can be related to Rajat's situation, as a lot of us face the same challenges when it comes to saving money. The reason being that we are not sure how to strike a balance between our spendings and savings.

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

With this article, we will solve this puzzle for you, simply by creating a budget, which will further help you decide where to invest money.

A budget is like a spending plan that helps you allocate money towards things that you want to achieve and choose the best investment plan to grow the money that you have. It is a simple and powerful way of money management and here's why you should have one:

1) Enjoy control over your money

If you have a concrete budget in hand, it gives you a clear picture of how much money you spend under different heads. It makes it simple for you to prioritize where to spend and where to stop. It helps you keep some money aside and invest in some of the best investment plans, which can be difficult to do without a budget.

What you can do?..

You can check your budgetary requirements every two months and they make necessary changes to your budget. With time your responsibilities and financial goals also change, therefore it is important to make modifications to your budgetary allocation too.

You can decide how much you want to spend throughout the month instead of cribbing about the money crunch at the end of the month.

2) Allows you to spend correctly

With a budget, you become the master of your money and can allocate funds in different buckets. And if you find that you have allocated too much towards the leisure bucket then you can diver it towards the Investment Plans bucket. And if you are doing good you don't need to feel guilty about allocating a large amount towards the fun bucket.

Initially, there can be a sense of restriction but once you find it beneficial you get attuned to this budget making habit. The key here is to set a limit and then stick to it.

3) Keeps your from overspending

The problem is not spending money, it becomes a crisis when you go overboard. With a personal financial plan like budget, you spend within the limit defined for each head. You will stop automatically when a particular budget limit is exhausted. You will find that your credit card bills have also certainly reduced.

There is no second thought that overspending can ruin your personal finances, the key here is to not to touch the funds allocated for a different bucket or head.

4) Helps you save money

Once you start following a personal budget you put a certain sum under the saving head as well. This is an important deciding stage of money management. In addition to this, you refrain from dipping into your savings when there is a cash crunch. Every small step that you take today towards saving helps in future wealth creation. Gradually, you can increase the size of your savings bucket.

What you can do?

You can automate your savings account as per your salary date. The idea here is that money out of sight is out of mind too. This money can be invested in one of the best investment plan.

5) Helps reach your financial goals

Once you start saving money you can focus on your future financial goals like a car, buying a home, education, retirement, etc. Even with small savings, time, and right investment plans you can build an adequate corpus to reach all your financial goals.

But for that, you need to set and identify your goals, and this is where a budget comes into the picture. Right investment planning is all about investing a part of your savings in one of the best investment plan instead of being clueless about where to invest money. Follow your budget to have some clarity regarding your goals, and stick to it to plan your investments:

For buying a house: You need to have a huge amount of money to buy your own house. By investing in one of the best investment plan you can be financially ready for such a huge investment. The corpus amount can be used for the down payment, and the remaining can be paid through home loans.
For child's higher education: Planning for your child's education is equally important. with the increasing education inflation, you can put some money towards one of the best investment plan for child education.
For child marriage: You can consider a little riskier investment plans being a longer-term goal. Here SIP in equity funds will make one of the best investment plan to reach the corpus.
For your retirement: For effective budget allocation towards retirement planning you need to invest in an adequate health insurance policy as well as investment plans that help you build sufficient corpus to live your golden years in a worry-free manner.
Building an emergency fund: It is one of the most over-looked but most important aspects of financial planning and money management. There is no point in allocating funds towards the best investment plan or creating a budget if you are not reserving for emergency funds to help you meet any unforeseen major expenses.

Tips for Budgeting

The key is to follow your budget, keep aside some money every month towards your every financial goal. An effective budget and strategic investment let the money grow over time.

Follow Your Budget and Start Investment Planning

Once you have determined your goals and your risk appetite, the next step towards investment planning is to plan your investment portfolio. One of the best investment plans or financial instruments you can consider for long-term goals is mutual funds, stocks, real estate, fixed deposits, etc.

It is important to diversify your portfolio in order to meet your future goals. By not putting all eggs in one basket you can use some funds for emergency situations while the others remain untouched.

Learn about all the investment options

But before you put your money even in one of the best investment plan, it is important to have some prior understanding of the different investment plans that are available in the financial market.

You can easily read about the different investment plans online such as stocks, mutual funds, gold, etc. and choose any of the best investment plan as per your needs. You can also check and compare the rate of returns and zero down on one that would solve your purpose and most importantly matches your risk appetite.

Once you have an understanding of the different investment plans you can select and invest on your own, which is a major step in investment planning.

Bottom line

Financial planning is not rocket science! But it is a great combination of how you save and the way you allocate your savings. It requires financial discipline in the present to enjoy financial freedom in the future. As you would have learned from the above article, all it requires is a personal budget to start with, some investment planning, and then sticking to it.

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).