Personal finance is all about meeting your goals without making much compromises to your current lifestyle. Irrespective of the profession you are in—whether you are a CEO of a company or working in a cafe—you cannot stay away from managing money.
It is a skill that can be developed over time, with practice. Traditionally, small businesses in India have thrived because of sound financial planning. Grandmothers can still find some 1000 rupee notes stashed away in a forgotten corner of a cupboard because they know how to fit in a whole family’s expenses within a certain budget.
What with demonetisation and the plastic money economy that India is gradually moving toward—it is really easy to just PayTM and spend money. With the swipe of a card you don’t actively have to remember what you spent and where you spent it.
This article will help you walk step by step and help understand how you can manage your own finances better. Do you really want to pay someone to manage your money? Why not take matters into your own hands?
Write down expenses
There are businesses who have managed their finances with nothing but a red notebook and a pen. Writing down each day’s expenses is an age-old habit because of which, people have managed to plan, save, invest and build wealth for their children.
On a piece of paper or on the notes app in your phone write out your earnings in one column and your expenditure in the other.
Chalk out your top five major expenses—these include your rent, groceries, instalments on loans—basic expenditure that you can’t avoid. Subtract your major expenses from the sum total of your salary and you will get the amount that you have available to you to do WHATEVER you want.
You can save, you can invest and grow that money over time. Or, you could just spend it! You can also save some in case of an emergency—as cash-on-hand that you can use. The rest of it, lets say, you decide to invest.
Count for inflation
When investing, consider a scenario where you follow the traditional route and decide to put Rs. 1.2 lakhs per year out of your surplus money in a fixed deposit which yields an interest of 8% per annum. If the FD expires in 10 years then your total capital at the end of that time period is Rs. 18,77,458.
However, this is taxable income. Lets say you are in the 20% tax bracket. The amount left over in your hand after tax deduction is Rs. 17,41,966.
Are these savings enough?
The larger question is: are these savings enough? Can you see yourself achieving your long-term goals if your total saving was equal to the amount mentioned above?
Take for example, that you have the following long-term goals:
- House: Rs. 50 lakhs
- Education: Rs. 5 lakhs
- Car: Rs. 10 lakhs
And you want to achieve these goals by 2017. The year is important because once you start thinking about inflation, the amount that is more than enough for your dream house in 2017 might get you just a few square feet in 2020.
This title seems counter intuitive, right? How can you plan for “unplanned” expenses. That is the trick, though! Being prepared for something that you can’t foresee is the foundation of financial planning. The sad fact of life is that tragedy strikes when you least expect it—be it an illness in the family, hospitalisation or untimely death of a breadwinner.
Anticipating these situations and saving a part of your paycheque is the best way to distribute your expenses. Being proactive about unexpected changes in lifestyle is the hallmark of smart money management.
Back in the day, people used to work with one organisation for years—they had a “secure job.” In today’s fast moving markets and economic changes, one can’t be certain that the job that you get in your 20s is going to continue until retirement. That’s when contingency funds come to the rescue. Many experts say that you should always have cash-in-hand enough to last you through at least two months of unemployment.
Fixed deposits vs. equity
Historically, the average Indian investor is more likely to choose a “safe” investment. Fixed deposits in banks are considered to be the safest because they yield a rate of interest over a period of time. There is a guarantee that you will get your money back. However, if you calculate the rate of inflation in addition to the fluctuating rate of interest according to the current status of the economy, you might even end up losing the money that you originally deposited.
In the battle between investing in fixed deposits vs. equity we can take a look at the average rate of return. If you invested Rs. 10 lakhs from 2001-2010 in Fixed Deposit, the final amount that you can take away after tax is Rs. 14 lakhs and 24 thousand. On the other hand, if you invest the same amount in equity then the final corpus even after tax is Rs. 36 lakhs and 98 thousand.
At the end of 10 years, you have more money that you originally invested. You are making money grow right now so that the future you can use it.
Stay on track
You don’t have to follow the tradition of physically noting down each and every cup of coffee you buy every day in a notebook. There are apps for that! Or, if you are like me—working in an office—and your laptop is your best friend. Just open up an excel sheet and start entering your daily expenses!
Check out this video which shows you examples of how you can master the skill of financial planning!
Originally posted on www.tradeacademy.in