Without proper budgets and controls, spending happens on impulse and this can lead to financial problems in future. To avoid problems arising out of indiscriminate spending, it is important to have a conscious approach toward your money. Money is an essential aspect of our lives and hence, knowing how to manage your money is a skill that you should learn to plan your finances for the rainy days.
Importance of money is often the most-talked about financial skill that everyone should learn as soon as they start earning. Here are a few ways you can manage your money:
1. Plan for your Money
Make your money work harder than you. Invest the money in appropriate asset classes depending on your financial goals, life milestones and monetary needs. Divide your goals into short-term, medium-term and long-term. This way, your money will continue to grow and you will also have access to liquid funds at appropriate life stages.
a) Park some money in emergency funds to cover expenses related to unexpected exigencies and emergencies.
b) Have, 1, 3, 5 and 10-year goals for your money
c) Spend some time to figure out important things you will need a few years down the line
d) Start saving in flexible investments like provident funds and Unit Linked Insurance Plans (ULIPs). These plans offer partial withdrawal after just five years which will be handy.
2. Always Invest for the Ultimate Goal
Your ultimate goal is the retirement fund that will hold you in good stead when you will not have a sustainable income or great health to fall back on. Invest a specific percentage of your income in pension funds and allocate a sizeable proportion to equities when you have time in hand.
a) Retirement is replicating your income from the employment years
b) Your expenses will be low but you will need to sustain them for 20-25 years
c) 10 – 15% of your annual income should go to retirement savings
d) Best investment options for retirement are:
- Fixed Returns: Public Provident Fund (PPF)
- National Pension Scheme (NPS): Market-linked portfolio, choose your asset allocation
- Unit Linked Insurance Plans (ULIPs): Market-linked portfolio, automatic asset allocation, investment up to 99 years of age. Plans like Invest 4G ULIP from Canara HSBC Life Insurance also adds bonuses for long-term regular investors.
3. Buy a Life Insurance
Buy insurance when you don’t need it, because you may not get it when you want it the most. Healthcare is expensive and continues to become costlier by the day. Having health insurance in place will ensure your hospitalization expenses are taken care of, should the need arise.
Life insurance term plans are affordable and are used to replace income in case of your unfortunate demise. The sum assured from life insurance will help your dependants sustain and meet living and education expenses. When signing up for life insurance, the sum assured should be at least 10 times your annual income.
a) Early subscription to term life insurance allows you low-cost life cover for a lifetime
b) Health insurance can help you with regular health check-ups as well
c) Motor insurance can do a lot more than just save you from traffic challan; i.e., cashless accidental hospitalisation for driver and passenger, accidental death and disability benefit, and so on.
d) Your life cover need will increase as you acquire family. So, check if you can increase your life cover later, or whether you will need to buy a new plan.
4. Get a Bank Account
You are spoilt for choice when it comes to banking options. There are a plethora of choices to pick from. Look at your needs and open an account that best suits your needs. Look at banks that charge low fees and offer benefits (such as cashback, waivers, on using their card.
Evaluate the convenience of banking such as the network of branches & ATMs, digital banking, phone banking etc. Keep money for your day-to-day expenses in your savings account and park money, that you may need in the short-term, in fixed deposits.
Here’s how a bank account benefits you:
a) Keep a track of your income and expenses
b) Earn interest on your surplus money
c) Invest money in short and medium-term deposits
d) Access many other investment possibilities through your bank account, e.g., Atal Pension Yojana, NPS, PPF, mutual funds, insurance, etc.
5. Control Impulsive Purchases
Before you spend, classify those purchases into needs and wants. Needs are necessities whereas wants are aspirational. Defer purchases that can wait if you cannot cancel them altogether. You will earn some interest/returns for the deferred period.
Postponing impulsive buying gives you more control over outflows. Simultaneously, it builds a corpus for you and you can always be prepared for important matters.
6. Analyse your Bank Statements
Identify your outflows and classify them under specific categories. In which category are you seeing the most expenses? Drill down into details and check if you can curtail any spending. Keep a tab each month to check any unknown debts and bring them to the bank’s notice within the timeframe specified by the bank in its terms and conditions.
a) Keep a tab on your spending habits
b) Check for unnecessary subscriptions and cancel them
c) Check whether interest is being credited on time and in line with the assured rates
d) Reinvest the interest
e) In fixed deposits, opt for reinvestment of interest so that you gain from the power of compounding
7. Learn about Investments
Spend some time learning about different options to invest your money. For example, asset classes such as equities have higher risks but can generate solid returns if you invest in fundamentally strong stocks and sustain that investment for a long. Use the classic thumb rule to save money.
Expenses = Income – Savings
Save first, spend later. Keep short-term funds in debt instruments. Ditto when you approach retirement-start moving your money from equity to debt to preserve capital.
a) Look for a risk-return relationship
b) Understand the ways to mitigate investment risks, i.e., how to minimise the risk of investing in equity stocks or mutual funds
c) Learn about covering emergencies with insurance
d) Know how to check for investment risk of portfolio investments
8. Learn to Cook
Cooking at home and eating is not only healthy but also financially prudent. When you eat out, you pay more for the service than the actual food or ingredients. The restaurants markup the price to cover costs of salaries, maintenance costs, infrastructure etc. This leads to almost a 300% markup on the food costs.
Imagine paying Rs 12,000 p.m. for something you could have for only Rs 4000.
9. Contribute to Social Cause
Philanthropy is good for society and has tax benefits as well. Invest in a cause that you believe in and deduct the amount, under section 80G, from your taxable income. Educate others whenever and wherever possible because education is the single most effective, proven method to break out of the vicious cycle of poverty.
Plus, staying connected to the ground has its benefits:
a) Know the right people
b) Have a good social presence
c) Upgrade your resume
When you develop the right mindset, managing money becomes much easier. When you start planning and setting goals, you will realize that many expenses are unnecessary. You will not only save money but also see it grow over some time. The only secret mantra is to start early and sustain the discipline.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.