Monthly Budget: Building a Household Plan From Documents

A monthly budget is a plan for a typical month, built line by line from documents rather than from memory. Each line carries the paper the number came off: the payslip, the rent receipt, the loan statement, the last three bank statements. Total the three kinds of outgoing against what comes in, and what is left is the surplus.

A budget calculator totals whatever is entered into it and has no view at all about any line entered. The calculator will not say that a rent is high or that groceries are low, it will not compare one household with anybody else's, and it has nothing to say about what to do with whatever comes out at the bottom. Every one of those decisions belongs to the household. The calculator does one narrow job: it holds four blocks of figures in one place and subtracts.

The whole of the craft sits in one habit, and it is not an arithmetic habit. A budget is only as good as where its numbers came from, and numbers supplied from memory are wrong in one direction rather than randomly. Every line on this tool therefore carries a note underneath it naming the document the figure is read off. The note is not there to make the tool feel serious. A household that reads its groceries off three bank statements gets a different answer from the same household remembering them, and the gap runs the same way every time.

The calculator is built against one invented household so the arithmetic stays checkable. The Bhosale household is three people in a rented two-room flat in a mid-sized city. Meghna Bhosale is salaried at Sahyadri Freight Services Private Limited. Ashok Bhosale runs a tailoring counter in a market lane, and what it takes changes every month. Ira Bhosale is seven and in school.

What does this working tool actually produce?

One number, and it is called the surplus. Everything above it is arrangement.

The arrangement is four blocks, in this order: what comes in, what goes out at the same amount on the same date every month, what goes out every month at a different amount, and what goes out once or twice a year and never turns up in a monthly plan at all. Add the last three together, subtract them from the first, and stop. There is no fifth block, no percentage, no target and no score.

Four blocks rather than two is the whole design, and the fourth one decides whether the answer is true. Most household budgets have two: money in, money out. Two-block budgets are wrong by whatever the once-a-year outgoings come to. For this household that is Rs 8,000/- a month, and the error is one nobody spots: the plan works beautifully for eleven months, and then a school term and a premium land in the same fortnight.

What goes on the money in block, and where is each number found?

Two lines go on the money in block, and they behave completely differently. Each is entered by its own rule.

The first is the salary line, and the figure wanted is the take-homeWhat actually reaches the account after every deduction has already been made. Take-home is the lower figure on a payslip, not the headline one. figure rather than the headline one. On Meghna Bhosale's payslip the gross is Rs 46,000/- a month and the deductions come to Rs 6,200/-, made up of provident fund Rs 3,120/-, professional tax Rs 200/- and tax deducted Rs 2,880/-. Rs 39,800/- lands in the account on the 1st, and Rs 39,800/- is what goes on the line. The rates behind those deductions are set by scheme and by statute; only this invented household's rupee amounts appear here.

The second line is the tailoring counter, and there is no payslip for it. The figure has to come off twelve months of takings, transferred into the salary account in one lump at the end of each month, so the bank statements carry them. Here is the year: April Rs 7,200/-, May Rs 12,400/-, June Rs 5,600/-, July Rs 4,800/-, August Rs 6,400/-, September Rs 8,800/-, October Rs 14,200/-, November Rs 19,600/-, December Rs 9,400/-, January Rs 3,600/-, February Rs 2,400/-, March Rs 1,600/-. The year comes to Rs 96,000/- and the average is Rs 8,000/-.

The field note on a variable income line does not say enter the average; it says enter the lowest month, and show the average beside it. For this household that is Rs 1,600/-, with Rs 8,000/- written next to it in smaller type. One thing about that list matters more than the rest: not one of the twelve months came in at Rs 8,000/-. The average is a figure the household never once earned, and a plan is for the months that are hard rather than the months that are easy.

Which paper carries each line in the fixed block?

The fixed block is the easy one, and it is easy for a specific reason: every line in it already exists somewhere as a printed amount with a date attached. Nobody has to estimate anything. Rent comes off the receipt. The loan instalment comes off the lender's statement, where the amount and the date of the standing instruction are both printed. Society maintenance comes off the bill. The mobile and broadband line comes off the bill.

A fixed line is one where the amount and the date are both the same every month, and if either of them moves the line is not fixed and belongs in the block below. That is the whole test. Within the month, a rent that goes up once a year is still one amount on one date, so the rent stays fixed. A repair bill that arrives when something breaks is not, whatever it averages out to.

Why does the variable block say three statements rather than one?

Every line in this block moves every month, so no single document carries the figure. A run of statements carries it instead, and the instruction on the tool is mechanical: open the last three bank statements, find the same category in each, add the three, divide by three. Three is a floor rather than a ceiling. Where a full year is on hand, read the year.

The Bhosale household had a year on hand, so its groceries line is the twelve month figure of Rs 11,200/-. Look at what a shorter read would have done. Across the year, groceries ran from Rs 9,800/- in February to Rs 13,400/- in October. Read off one statement, this line could have been anything across a spread of Rs 3,600/-; read off any three consecutive statements it narrows to a spread of about Rs 2,217/-; read off twelve it is one number. October alone would have overstated the line by Rs 2,200/- a month. February alone would have understated it by Rs 1,400/-.

The remembered figure on that scale is worth a second. Ask a household what it spends on groceries and the mind does something reasonable: it reconstructs the ordinary week and multiplies. For this household the ordinary week is Rs 2,725/-. Four of those weeks make Rs 10,900/-, a real number and April's actual figure. The reconstruction leaves out every week that was not ordinary, and the weeks that are not ordinary only ever add. Memory is not random about this: it drops the visitor, the festival top-up and the month the child needed shoes, so a recalled figure sits below the read figure rather than either side of it.

Electricity is the line that makes the case for three statements on its own. Across this household's year it ran from Rs 900/- in December to Rs 3,400/- in May, averaging Rs 1,850/-. Build the budget in December off one statement and the line goes in at Rs 900/-, under half of what May will ask for.

How does a yearly item get onto a monthly tool?

By division, and by staying visible afterwards. The second half of that instruction is the part that gets dropped.

The Bhosale household has a set of outgoings that are certain to happen and never happen monthly: school fees in three terms of Rs 9,600/- in April, August and December; a life cover premium of Rs 9,600/- in July; a health cover premium of Rs 14,400/- in September; two-wheeler insurance and servicing of Rs 4,900/- in January; festival spending of Rs 9,900/- in October and Rs 6,600/- in November; travel to Ashok Bhosale's mother of Rs 3,600/- in May and Rs 3,600/- in December; clothes and footwear of Rs 3,200/- in April, Rs 3,400/- in October and Rs 1,800/- in March; repairs, replacements and gifts of Rs 2,100/- in June and Rs 4,100/- in February. Added up that is Rs 96,000/- for the year, and divided by twelve it is Rs 8,000/- a month.

Now the important part. The Rs 8,000/- goes in its own yearly blockOnce-a-year and twice-a-year outgoings, added for the whole year and divided by twelve, kept as a separate block instead of being mixed into the monthly lines. and is never mixed into the fixed or variable totals. Rs 8,000/- a month is arithmetic rather than something that happens, and folding it into the other blocks hides the fact that the real payments land in lumps. The largest lump is Rs 14,400/- in September and the smallest is Rs 1,800/- in March. April carries Rs 12,800/- and December carries Rs 13,200/-. Not one month of the twelve costs Rs 8,000/-.

What comes out at the bottom, and how is it read?

Before the number, one thing worth knowing: the number will look worse than it is. A budget built the conservative way, on the lowest month of a variable income and with the yearly block left in, produces a shortfall for most households that build it honestly, and that is what makes the tool useful rather than what makes it alarming. The shortfall is not a verdict on how the household lives, but a measurement of what the hardest ordinary month looks like, taken while nobody is in it.

So: money in as entered is Rs 41,400/-. Fixed Rs 19,400/-, variable Rs 18,520/-, yearly Rs 8,000/-, total out Rs 45,920/-. The surplusWhat is left after all three kinds of outgoing have been taken off what came in. When the outgoings are larger, the same line shows a deficit instead. is minus Rs 4,520/-, which is a deficitThe gap when the three kinds of outgoing come to more than what came in. The deficit is a measurement, not a judgement about the household. of Rs 4,520/-. Enter the counter at its average of Rs 8,000/- instead and money in becomes Rs 47,800/-, and the same tool shows a surplus of Rs 1,880/-.

Both readings are correct arithmetic on the same household. The tool shows both, and it shows the conservative one first. Between them sits one figure worth writing on the back of the sheet. Rs 45,920/- of outgoings less Rs 39,800/- of salary leaves Rs 6,120/-, so the counter has to take Rs 6,120/- for the month to come out level. Five of the twelve months came in below Rs 6,120/-.

Which line goes wrong most often, and what does it cost?

Read the two lines on that drawing together and the tool stops being about optimism and starts being about arithmetic. The dashed line is the average. Seven bars sit below it. The solid line is Rs 6,120/-, the figure at which this household's month comes out level. Five of the twelve months came in below the solid line. April and August cleared the level line without clearing the average, which is exactly the kind of month a budget built on Rs 8,000/- reads as a shortfall when it was not one.

What does the tool leave out on purpose?

Three things, and leaving them out is what makes the output mean something rather than being an oversight.

The first is money moving between the household's own accounts. The Bhosale household pays Rs 2,000/- into a recurring deposit on the 15th of every month, or Rs 24,000/- a year. The deposit is not on the tool. The money has not been spent: it is still the household's, sitting in a different place with the household's name on it. Put it in the outgoing blocks and the surplus shrinks by Rs 2,000/- while the household is no poorer by a rupee.

The second is anything that has not happened and has no document. A plan for a typical monthA constructed month made out of averages and documented amounts. No actual month of the year has to resemble it. is built from what the household already knows it pays. A hope, an intention or a figure somebody would like to be true has no paper behind it, and the field note has nowhere to point.

The third is any judgement whatsoever about the lines themselves. The tool has no view on whether Rs 1,600/- a month on eating out is a lot, whether the rent is worth it, or what anybody else with a similar income does. The tool does not know and is not built to know. Adding four blocks and subtracting three of them from one is all it does.

Where is every number on this tool actually found?

One list decides whether the finished sheet is a plan or a guess, and the whole of it sits below. Six kinds of document produce sixteen numbers, and not one figure on the tool comes from anywhere else.

The phrase is worth spelling out once. A field noteThe small line under an input naming the document the figure is read off. The note answers where the number came from, never what the number means. answers one question and refuses another. The note says where the number is found. Whether the number is good, bad, high or low is not the note's business, and the note stays silent about it.

Who else reads a household budget, and what do they take from it?

A household budget rarely stays inside the household. Other people read it, in situations the household did not choose, and knowing what each of them is looking at is useful.

A lender assessing an application for credit reads the fixed block first. Instalments are the lines a lender can compare against the instalment it is being asked to add. The lender is not reading the surplus for its own sake; it is reading how much of what comes in is already committed on a fixed date. A household that can hand over a fixed block with a document behind every line is answering a question that would otherwise be answered by an estimate. A landlord or a rental agent reads the money in block and asks for the payslip that sits behind it. A school or a scholarship office asking about circumstances reads the yearly block, the one place a school fee actually lives.

And the household reads it too, once a year, for a different purpose than any of them. Everybody outside is asking whether the household can carry something new. The household is asking what a hard month looks like while it is not in one.

How often is it worth rebuilding, and what forces a rebuild early?

Once a year is the ordinary rhythm, and two events force it sooner. The two forced triggers are a change in money in and a change in any fixed line, and both mean a full rebuildRedoing the budget from documents, block by block, instead of editing last year's figures wherever a change happens to be noticed. rather than an edit to the line that moved.

The reason is the quiet drift. Say the rent goes up. The obvious response is to open last year's sheet and change Rs 14,000/- to the new figure. The edit leaves behind six variable lines still carrying last year's averages, and the variable lines are precisely the ones that move without announcing anything. Groceries do not send a letter. Electricity does not either. So the sheet ends up correct in the one place somebody looked and stale in the six places nobody did, and it looks exactly as authoritative as it did the day it was built.

The Bhosale household, Meghna Bhosale, Ashok Bhosale, Ira Bhosale and Sahyadri Freight Services Private Limited are invented.
Educational material. Not advice on any investment, tax, budget or market position.