REIN YOUR EXPENSES

Mr. Bhushan has perpetual problem. Every month he earns seven thousand rupees and he spends seven thousand and five hundred rupees (the extra money is loan from friends). He had a good raise this year, but somehow he still could not save anything. The reason was he subconsicously increased his expenses with increase in his income. Result is , money crunch. Many of us are like Mr. Bhushan. We spend whatever we earn and then regret that nothing has been saved. If you are constantly worried because money is going at the end of the month, you need to do some serious financial planning. We are not refering to make investments because unless you are saving anything you cannot make any investment. Remember, every expense avoided is money saved. Hence, you should closely monitor your expenses. If you find this difficult, you could take the initiative of drawing up a cash flow statement and record from where the money (income) came during the month and where it (expenses) went during this month. That would give you a fair idea about why you are short of money every month. Most important aspect of this exercise is that you should some how find the way, so that you can start saving.

 

Plan a saving strategy If, you do not have it already you should plan for one. Start disciplining yourself. You should start putting aside a small amount from your income every month. It could be as little as 10% of your salary. Assuming your salary increases by 10%, you should save this increase. For example, your salary is Rs. 10,000 and it increases by 10% to, 11,000 then you should start saving at least Rs. 1000 per month. Try to spend less and save more. Contrary to popular belief, a person does not need to have a lot of money to start investing. The truth is that the time and not money, is most critical element of any investment plan. Your money grows with the passage of time with the help of power of compounding. Your little but regular contribution over a long period of time can grow into a huge amount. If an individual saves just Rs. 2000 a month between age of 20 to 30 and invests it at 12% p.a. without touching it, the amount would grow to Rs. 71 lakhs by the time he reaches 60 years. Just imagine what you can achieve out of Rs. 2000 per month! Decide your objectives We all save for one thing or another, be it a house, a car, a home theatre system. But only a few of us would mind it to put this down on a piece of paper. Unless we are aware of what we want to achieve we will not be able to achieve it. If you have decided on spending, then be clear about where you want to spend and fix a limit on the amount you want to spend. You should also prioritise your objectives. Saving for your retirement or contingencies should be on the top. Insurance is more important than buying a home stereo system. Buying a house is more important than buying a car. Set your time frame. All objectives would take certain time period to achieve. So, set the time period accordingly to the priority already fixed by you. Sit with your family and have a consensus among the family members about it. Analyse your Networth  How do your assets and liabilities match each other. In other words, is your account flush with funds or you are drowning in debt. List out your assets and liabilities completely. Do not leave anything out, whether it is borrowing from friends or an interest free loan from family. Loan from company should also be considered even if it is deducted before you are handed over your salary cheque and also add your credit card bills. Check the interest rates on your loans. Are they high? If they are, then switch on to other loans with lesser interest payout. When you are noting down your income, do not only consider your salary, also take into account your rentals, dividend from shares etc. In other words all sources, which could bring in cash must be considered. Draw out a Cash flow statement So, now you would have decided on to save a fixed amount every month to build a nest egg. You would be aware as to what your objectives are and what is the time frame to achieve the same. That means you can now draw up a cash flow statement for yourself indicating clearly, where your money is coming from and where it is going. You will now come to know how much you need to spend on a particular item and where you can cut if the need arises. If your outflow is greater than your inflow you will atleast know where your money has gone. YOUR BALANCE SHEET

Assets                                            Liabilities Life Insurance                            Life Insurance Premium Company Fixed Deposits               Personal Car/ House Loan Mutual Fund Units                       Taxes Bonds                                       Rent Post Office Saving Schemes         Credit Card Outstanding Public Provident Fund                  Bank Overdraft Cash in Hand                             Mortgage Loans If you are setting liabilities out of your assets you are following wrong strategy. You should be servicing loans, paying taxes, insurance premium and other bills out of your regular earnings.