We live in a time where life just seems to get more expensive by the minute. A meal you ate for Rs. 1000 back in 2007 costs Rs. 1700 today, and before you know it, every bit of your hard-earned money disappears without a trace.
That’s where the importance of planning your money comes in. And no, don’t pay attention to dear old John Lennon saying life is what happens to you, when you’re too busy making plans. Because this rule doesn’t apply. More importantly, Lennon was a rockstar, and didn’t need to plan his money. He probably had someone to do it for him. But that’s a different story.
Financial planning is not just a number’s game. There’s also your mindset to add to the mix; the kind of living standard you’re used to, where you plan to be X years hence, and financial goals. Keeping all this in mind, here’s a crash course in how to start planning your money.
1. Divide your income
You get a salary every month, say Rs. 50,000. As soon as you get it, set aside a certain percentage for your saving and investment. Assuming you’re comfortable with saving 10, 000, transfer this to your savings account, and forget about it for all practical purposes. It’s for investments, which we’ll talk about later. Create your budget on the remaining Rs. 40,000.
2. Make a budget
This is one of the more important things you need to do. Sit down and make a list of all your expenditures under different heads – rent, travel, food and groceries, entertainment, and so on. Jot down the numbers you need under these heads, and stick to them. Be sure to not make your budget too tight, otherwise you’ll be pinching from your savings, and that defeats the purpose.
3. Don’t spend more than you earn
Seven banks will call you in a single day offering you a credit card. While it sounds like the adult thing to do, use it sparingly. The best and most effective way to go about it is to NOT use your credit card for things you can’t otherwise afford. Instead, buy something only if you have the money in your account right now, and pay off your card’s balance every month. Why? Because it’s easy to spend plastic money, and before you know it, you’ll be in debt. Deep, gruesome debt. It’s only a matter of time.
4. Save money in deposits for large purchases
You don’t make the decision to buy a PlayStation or a 4K TV on a whim, right? If you do, you don’t need to read this because you probably own a bank or something. The point is, more often than not, the plan for an expensive purchase is made in advance. So save up for it. Put aside an installment every month in a recurring deposit, and buy your TV with the matured value. This way, you steer clear of credit, and you clear the entire transaction at once.
5. Set aside an emergency fund
I cannot stress on this enough. Life is a most unpredictable dance, and anything can happen anytime. While I’d like to stay positive and hope good things always happen to you, sometimes it’s just beyond anyone’s control. Calamities happen, and more often than not, funds are needed.
So say your budget covers 35,000. You’re still left with 5000 to spare. Transfer it to another account, one that’s less easy to access. Treat this as your emergency money. Keep adding to it every month, and you’ll find you’ve accumulated a fair amount to use on that trip you’ve been meaning to take for ages.
6. Make money of your existing money
At the end of the day, you’re saving for a comfortable retirement for you and your family. So let’s go back to the initial Rs. 10000 you set aside. Split it between investments. Put some money into low risk mutual funds, that will accumulate to give you a substantial figure after 10-15 years. Get yourself insured. If you want to dabble with high risk investments, you could try dabbling with the stock market.
As is the key with most things, assess your money and your lifestyle. Particularly, after you get a raise. Because with more income comes more needs. It’s called lifestyle inflation. So be prudent enough to keep a check on yourself.
That’s not to advocate being stingy. Because you’re earning for yourself, and you deserve to spend it on things you want. But be patient, and be wise.
You’ll only be richer for it.