Have you ever wondered, no matter how much money you make, the yearly pay raise, the promotion etc, somehow you always end up with a deficit budget most of the time. Saving money and accumulating wealth can be a challenge no matter how much money is coming home in your paycheck.
The purpose of this article is to help you get your financial habits in order and move towards financial prosperity – One step at a time..
Lets get started, shall we?
Step 1: Know Where Your Money Is Going
It was early 2013, I had recently gotten married and had to get my finances in order because now I have a wife and soon I will have a family of my own. At the end of each month, invariably my bank account was almost empty and I was always left wondering – what the hell is going on. So, as a first step, I decided to track where my money was going.
I picked up an old diary and started noting down the expenses on a daily basis for a month. At the end of the month I had a clear idea of exactly how much I was spending each month and on what. Even the brightest of minds cannot remember every little aspect of our spending habits and it doesn’t hurt to note them down. Use a notepad and pen or use an excel in your laptop or if you have a smartphone, use one of those expense tracking apps.
At the end of the month – review your spendings and identify the areas where you feel you can cut-down.
Every year when we get a pay raise, our spending patters change. The moment our mind senses that we will have more money to burn, we will end up burning all of it and maybe more. So, Unless you identify this unwanted spending category, you will continue to be in deficit up until the point when you either start tracking your expenses or you hit the lottery
Step 2: Know How Much Yow Owe
Kudos on starting on your one step at a time program towards financial prosperity. If you started out with step 1, you will realize exactly where your money is going at the end of the month. If you are someone who goes by the mantra “Cash is King” and does not have any Loans, then you can actually skip this step as well as the next.
If you are like the majority of the population, you will invariably have some loan or the other. Car loan, bike loan, home loan, personal loan, education loan, credit card outstanding etc and etc… The more categories under which you have loans, the more difficult it is to get out of the situation and move towards a loan free or debt free life. Anyways – it is not impossible. All you need is a little discipline and a plan…
Before we work on the plan, sit down, call up your respective loan providing banks and list down the total outstanding amount against each of the loans. Total it up and you are all set for Step 3…
Step 3: Plan for a Debt-Free Future
Being Debt Free is not just a dream – it can be reality. All we got to do is plan. Go back to step 1 where you identified all the categories of spendings where you feel, you could cut-down on. Start right away. By cutting back on unwanted spending, at the end of the month you will have an amount with you that would remain.
Plan A – If you have a lot of Loans:
Put it in a bank account and forget about it. Repeat the exercise each month. Cut-down on unwanted spendings and accumulate as much money as you can, in this account. If you get a pay raise, forget the fact that you have more money to spent. Divert the additional income to this account. By the end of the year, you will definitely have a sizeable amount which you can use to repay all or part of at least one of the loans. Repeat this exercise every month/year and you will be debt free in the next 3-5 years.
Yes, I understand 3-5 years may sound like a long time but think of it this way, if you don’t plan like this, you will most likely take 8 or 10 years to repay the loans. Which one sounds better?
Plan B – If you have lot of Credit Card – Outstanding Debt:
Credit Card debt is like forest fire. Even though the bank only insists that you make the minimum repayment due amount, they will be charging you hefty interests on the whole outstanding amount from the date you swiped to your card up until the date you fully repay it. So, whatever surplus you end up with at the end of the month, use that to repay the credit card outstanding debt ASAP…
Step 4: Build an Emergency Corpus
Gone are the days when both employee and employer were loyal to one another. These days, companies aren’t as loyal to its employees as it used to be. Even at the slightest forecast of lower sales or lower profit, heads start rolling. This is very common in almost all private sector companies across the globe and industries. So, we should be safe. Isnt it?
Start the month with 10% of your salary diverted towards this emergency corpus. If you cannot start with 10% right away, start small – 3% or 5% and then implement step 1, identify unwanted expenses and increase this emergency corpus to 10% every month. Only spend what remains after this 10% contribution.
It might sound like a lot, but trust me, this emergency corpus will go a long way to help us in the unfortunate event of we losing our job. Or maybe one of our loved family members is sick and we need money for medical expenses, this emergency corpus will come in really handy…
Step 5: Invest your savings – Don’t let it stay idle
Money that is left idle in your savings account is probably the biggest financial crimes we can commit. If you followed Step 1 – you could’ve identified the amount or surplus you can save each month (by cutting down expenses + identifying how much money will remain at the end of the month). If you follow step 4 – you will keep a % of your income each month as emergency corpus. So, a smart guy/girl would invest this money – rather than let it stay idle in their account.
Plan A – For the Emergency Corpus: Start out a Recurring Deposit for the amount you wish to set aside. Select duration as 1 year and at the end of 12 months, restart a fresh RD and deposit the maturity proceeds as a Fixed Deposit.
Plan B – For the Monthly Savings: Start out a Mutual Fund SIP for the amount you can afford to save each month. If you want you can choose a full equity fund or something that is balanced between equity and debt. The fund you choose is your choice but remember to select a fund that has equity exposure. Otherwise there wouldn’t be a difference between this and the RD.
Step 6: Plan for a Second Income
Though this is something that wouldn’t be feasible for everyone – right off the start, with a little planning and effort this is quite possible.
Fixed Deposits have monthly or quarterly interest payout options. After a few years’ worth of accumulating the emergency corpus, this corpus can actually make a small but regular income for you. If you have surplus, you can buy an extra house/shop and rent it out to make an extra income. You can also try freelancing like tuition classes to supplement your income.
Don’t start out with hopes of earning thousands each month. Such plans will most likely start off small but as time goes by, there is only one way to go à UP…
A Word of Caution:
Following these 6 steps does not guarantee that you will be a millionaire soon. But, it can guarantee that your finances will get sorted out, your spending pattern will change and you will start saving more than what you are doing now…
If you get a Bonus at the end of the year (even private co.’s have started giving out bonuses at the end of the year). If something like that happens, don’t splurge all of it. Save at least a part of it (preferably 30% or more) and use the rest to enjoy the fruits of your hard work throughout the past year..
Some Last Words:
Becoming Rich and Financially Prosperous usually requires a lot of effort (Unless you are rich by birth or hit the lottery). A Smart person always knows where his money is going, keeps his debt to the minimum and invests prudently for many years to achieve his/her goal of financial prosperity and independence. Hope you found these tips useful…
Happy Saving Money!!!