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Proper Money Management

Expenses can never be in control unless you plan for them. For most of us, the monthly inflow is fixed, while the outgo on current household needs vary and tend to move upwards every month. This leaves us with less investible surplus to meet future needs. Uncontrolled expenses will always hold you back from making the right moves in investments. So, it is important that you identify your fixed, discretionary and nondiscretionary expenses at the outset, for this will help you reduce your expenses and help you increase your savings.

BUDGETING

Budgeting is the most practical way of keeping track of your spending and, more importantly, maintaining a grip on it. These days, several websites and software help you prepare your household budget. Some credit card issuers even furnish statements showing a break-up of your expenses. A regular follow-up of these will help you know the trend of expenses. Remember that only after you have a budget can you keep a tab on your expenses. You can check whether you are actually spending your money the way you want to. Most of us follow the ‘income minus expenses’ method when it comes to adding to our savings. The better approach is, however, the ‘income minus savings’ method with the balance to take care of expenses. So, budgeting helps you keep a check on your expenses, while focusing on savings helps you meet long-term goals. Reassess your needs and wants and reduce your discretionary expenses to generate a surplus that may later be invested in financial products.

LEVERAGING

When your income fails to meet your household expenses, your resort to loans. Flexible financing options such as equated monthly installments (EMIs) have made loans a viable option. While some, such as a home loan, help you create an asset, they also stretch your budget. As a thumb rule keep the total monthly EMIs to about 40-45 per cent of your take-home pay. Within this try to maintain the home loan, auto loan, personal loan and education loan EMIs within 40 per cent, 25 per cent, 20 per cent, and 30 per cent of your total loan liability, respectively. The savings so attained will help you build an investible surplus to meet your long-term goals. Pay your credit card dues in one go to minimise interest burden.

INFLATION

Non-maintenance of a budget and mindless leveraging apart, inflation, too, cuts into your savings. In simple terms, inflation is the level of consumer prices resulting in the loss of purchasing power of money. If you compare the amount you spent on groceries 10 years ago and what you spend today, you will find the sharp rise in prices over the period. Inflation is a silent killer of the purchasing power of money.

THE SAVIOUR

To create wealth over the long-term, you need to put your savings into assets that can deliver returns higher than inflation of at least 300 basis points. Historically, equities have provided such returns—over other asset classes like gold, real estate or debt—over the long-term. So, irrespective of your risk profile, invest in equities either directly through stocks or equity mutual funds. The latter suits those looking to participate in equities without much risk. Choose well-performing equity mutual fund schemes and start saving regularly through them, preferably through the systematic investment plan (SIP) route. Link these savings to your long-term goals and stick to them eschewing any partial or full-exit in between. Remember to review investments on a regular basis and keep diverting any income raise or bonuses into existing savings. Once the forced obligations like home loan EMI’s or insurance payments stops, divert them towards existing investments.

Next To Come: Saving for a Better Future