Are you someone who always finds the month-end to be a difficult time? You’re broke and looking at your account balance that is just shy (or not) of a zero, all you can think of is “Utha le re Baba”. You pledge to financially discipline yourself starting next month, but we know how that goes, right?
So, what to do to avoid this hero-to-zero story you undergo every month? While no one can promise you a “21 din main paise double” scheme to help you tide over the tough last days, there is something you can do to make sure you’re comfortably afloat over the overwhelming waters of finances. Read on :
Budget the 50/30/20 way
Well, making a budget may seem like a boring exercise to undertake, but it will completely transform your financial well-being. Simply put, budgeting simply means accounting for every penny you have. Once you know where your money is coming from and where it's going, you’re not going to have to scramble over and worry about when you made that impromptu purchase of Rs 5,000, because of which you aren’t left with enough money to finance your solo trip!
So, it's simple. On one side, you make a list of all your income sources, like your regular income, some extra money you took off your elder sibling, payments from your freelancing gigs, and more. And on the other side, make a note of your expenses, be it rent, wishlists off Amazon, concerts, buying Mom’s favorite sari as her birthday gift, and more. Also, leave some money aside for impulsive splurges as well!
But how? Have you heard of the 50/30/20 rule? To start with, you can follow this simple breakdown to manage your expenses. To begin with, figure out your after-tax income. Say it stands at Rs 35,000!
Now, allocate 50 percent of this amount i.e. Rs 17,500 for your needs. Now, this includes paying for your rent, electricity bills, transportation, basic utilities, and more. These expenses are non-negotiable and necessary, hence, this portion should be carved out foremost and exclusively for funding them, so that you don’t miss out on their timely payments!
In case this section exceeds the 50 percent mark, dip into your “wants” segment to finance it. But if you’re lucky and your necessities do not exceed the 50 percent mark, make sure to double up on your savings and investments and a little on your wants as well!
Now, we often misconstrue wants for needs and try to justify our desire to buy our favorite dresses and sneakers as an absolute essential. It is important to distinguish between what you actually need and what you think you need. Think about it, do you really need the new iPhone X if your old, trusty phone you bought 8 months back is perfectly fine?
The next 30 percent, i.e. Rs 10,500 should go towards your wants. This is where you can splurge on all you want. Remember, while separating wants from needs, identify if the thing in concern adds value to your life in any way. And if it honestly does, go ahead! While this can vary individually, here is where you can budget for your club nights, solo trips, shopping sprees, and more. This is also where you keep some wiggle room in case of unforeseen expenses or emergencies.
As Nema Chahaya Buch, a personal finance strategist puts it, “It's important to understand the differences between Needs, Wants and Desires. Maintain the habit of preparing a budget and more importantly, sticking to it. . Prepare a financial plan yourself or with the help of a personal finance advisor and map out a sound investment plan. This may sound like a cumbersome exercise when young, but it gives a great feeling of relief for self and family as you grow”
Also, when it comes to spending on your wants, we often resort to credit cards. While they can be tempting with all their cashbacks, immediate gratifications, and rewards, they can also route you towards impulsive spending, spiraling your budget out of track. Moreover, if you delay your payments or make them in part, the interest rates could pin you down heavily.
“Personal loans on your credit cards are the most expensive, so that's a no-no. Also, it is not advisable to take multiple credit cards in your name if you are not going to use them all. Not only does it reflect poorly on one's credit score, but unnecessarily expanding your credit limits can tug at your self-control and discourage you from financial discipline. Many credit cards give reward points, but don't just shop to earn those reward points bcoz that will spiral you into impulsive spending”, Buch elaborates
Commit the remaining 20% of your income, or Rs 7,000 to savings, investments, and debt repayments, if you have any. Start with a simple SIP (Systematic Investment Plan) in mutual funds and continue adding to your corpus every month. There is a huge difference between savings and investing, with the latter's benefits outweighing the former.
Consider this. You simply save these 7,000 rupees for 10 years every month. Your total savings will amount to Rs 8,40,000.
But if you just invest this money (Rs 7,000) every month for 10 years in the market, with an assumed return rate of 12 percent, you stand to earn additional returns of Rs 7,86,374 over the principal amount of Rs 8,40,000, taking your total value to Rs 16,26, 374, just double the amount of your savings!
So, don't wait for the right time to start investing and budgeting! Heed to Sanjeev Dawar, personal finance advisor, when he says “Begin your personal finance journey right from the first paycheque”.
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