Budget
A list of all the money a household expects to receive and spend over a period, and when each amount falls due, used to check whether income is being managed well.
In plain language
Every household earns money and spends money. A budget simply writes both sides down: every item of income, every item of expense, and the amount and timing of each.
With everything on one page, it becomes easy to see the whole financial picture at a glance — and to see whether there is money left over to save. The workbook notes that many people follow the Union Budget closely every year, but never sit down to make their own personal budget.
How it works
A budget is usually built for a month, since most income and many expenses, such as an electricity or telephone bill, recur monthly. Building one starts with listing every head of income the household expects — salary, business income, rent received and so on — and then every head of expense.
A well-built budget separates expenses into three kinds: mandatory and legal payments, such as taxes, provident fund contributions and loan EMIs; essential living expenses, such as food and shelter; and discretionary expenses, such as holidays and lifestyle spending. Savings for goals should be set aside before discretionary spending, not after it — the workbook calls this 'Income minus Savings equals Expenses', the opposite of the usual habit of saving only what is left over.
A budget is not a one-time document. It needs regular monitoring, comparing what was budgeted against what actually happened, so gaps can be corrected.
A worked example
The Kulkarni household in Pune earns Rs 1,20,000 a month between two salaries. Their monthly budget looks like this:
| Head | Amount |
|---|---|
| Income (salaries) | Rs 1,20,000 |
| Home loan EMI | Rs 35,000 |
| Provident fund and taxes | Rs 12,000 |
| Food, utilities, school fees (essential) | Rs 38,000 |
| Dining out, entertainment (discretionary) | Rs 10,000 |
| Savings and investments | Rs 25,000 |
Total outflow, including savings, comes to Rs 1,20,000 — matching income exactly. If the Kulkarnis had instead spent first and saved whatever was left, an unplanned Rs 15,000 spent on a family trip could easily have crowded out the Rs 25,000 savings target for the month.
Why NISM asks about it
Chapter 1, section 1.3.2, introduces cash flow management and budgeting as part of the scope of financial planning. Chapter 3, section 3.2, 'Preparing Household Budget', walks through how a budget is built and read, and section 3.5 covers its monitoring. Expect a question on what a budget captures — income, expenses and timing — and on the principle of saving before spending.
Common exam traps
- A budget is not the same as a personal balance sheet. A budget tracks income and expenses over a period; a balance sheet is a snapshot of assets and liabilities on one date.
- 'Income minus Expenses equals Savings' looks natural but is the order the workbook advises against. The recommended approach is 'Income minus Savings equals Expenses' — decide savings first.
- A budget without monitoring does not achieve much on its own; see budget monitoring for why.
Check yourself
1.According to the chapter, a budget is:
- a)A record of all past expenses of the household
- b)A list of inflows and outflows along with the time period when each will take place
- c)A statement of assets and liabilities at a point in time
- d)A projection of investment returns for the coming year
Show the answer
Answer: (b) A list of inflows and outflows along with the time period when each will take place
"A budget is nothing but a LIST OF THE INFLOWS AND OUTFLOWS that an individual will witness ALONG WITH THE TIME PERIOD WHEN THIS WILL TAKE PLACE." A statement of assets and liabilities is the net worth statement. The chapter notes wryly that many people follow the Union Budget but fail to budget for themselves.
2.Arvind Menon earns more than he spends every month. This month his children's school fees and the society maintenance charge fell due on the 1st, but his salary was credited only on the 10th, and he had kept no reserve. According to the chapter, what has Arvind run into and what is the risk?
- a)Nothing — a person who spends less than he earns cannot face a cash flow problem
- b)A debt trap, which requires counselling, handholding and liquidation of assets to pay off debts
- c)An insurable risk, which should be transferred to an insurer by paying a small premium
- d)A cash flow mismatch — without a reserve it can force short-term borrowing, which is extremely costly, and part of what he finally saves may go into paying off that debt
Show the answer
Answer: (d) A cash flow mismatch — without a reserve it can force short-term borrowing, which is extremely costly, and part of what he finally saves may go into paying off that debt
Section 1.3.2 says cash flow problems arise when the inflows and outflows of cash do not match, and warns: "There can be a situation wherein a person spends less than what they earn but still run into cash flow problems. For example, if there is a large expense made at the start of a month it can lead to a cash crunch if there is a delay in the receipt of income unless there is a reserve present. In fact, it could lead to short term borrowings which are extremely costly in terms of interest rates. This could lead to a part of the amount that is being finally saved to be directed towards paying off the debt incurred due to the cash flow mismatch." That is Arvind's position exactly.
The chapter's remedy is "to have a budget with cash flow dates" — a list of inflows and outflows "along with the time period when this will take place".
Option A is wrong because the chapter says the opposite: a surplus on paper does not stop a timing mismatch.
Option B is wrong because a debt trap (section 1.3.4) comes from excessive borrowings, where borrowers "need counselling and handholding" and "assets may have to be liquidated". Arvind has a timing problem, not excessive debt.
Option C is wrong because insurance (section 1.3.3) covers unexpected events such as death, disability, illness, fire or theft. A salary credited on a known later date is a timing gap, not an insurable event.
3.In making a budget, what is left after deducting mandatory expenses from total income?
- a)Savings
- b)Disposable income
- c)Net worth
- d)Monthly surplus in hand
Show the answer
Answer: (b) Disposable income
Step 2 of the four steps is: "List and deduct the mandatory expenses from the total income. WHAT IS LEFT IS THE DISPOSABLE INCOME." Essential living expenses are then deducted, followed by discretionary expenses, to arrive at savings.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Budget monitoringThe ongoing process of recording actual income and expenses against a budget, so gaps between plan and reality can be spotted and corrected before they derail a household's savings.
- Cash flow managementMaking sure a household's money comes in and goes out in a way that always leaves enough on hand to meet expenses when they fall due, even if total income comfortably exceeds total expenses.
- Cash flow mismatchA timing gap in which money going out falls due before money coming in arrives — so a household that earns more than it spends can still run short of cash and be pushed into costly borrowing.
- Income-expense statementA personal financial statement showing actual income earned and actual expenses incurred over a period, recorded on an accrual basis rather than when cash actually moves, revealing the real surplus or shortfall.
- Zero base budgetingBuilding a budget from a clean slate each period and justifying every expense afresh, instead of adjusting last period's numbers — a corporate technique applied to household budgets.
- Mandatory expensesThe first layer of a household budget: amounts that must compulsorily be spent — tax, loan repayment and provident fund contribution — before essential living or discretionary spending.
- Monthly surplus in handThe cash left with a household at the end of the month after every expense and investment — which is smaller than its savings, because mandatory deductions such as PF are savings too.
- Consumption expenditureSpending that, once made, does not create an asset or generate further income, such as dining out or clothes, as opposed to investment expenditure, which builds an asset that can pay the household back.
- ForecastingThe disciplined look-ahead that turns known data and expected changes into an estimate of future income or expenses — the basis a household budget is then built on.