Knowing our problem:
India is an emerging superpower of the world. Our country is ready to overtake United Kingdom to become the world’s fifth biggest economy. The earning power of most of the Indian population has improved in the recent times but unfortunately most of the young Indians are unable to save 15% of the salary. At the end of the month you keep wondering how you have spent your hard-earned money. Sometimes, you may be forced to borrow money from dear and near ones to pay your essential bills.
If you need to change this situation first and foremost, you have to map down all your expenses in detail which will help you to cut the unwanted expenses. The best way is to keep a budget for each and every expense and review them every month. Generally, we are afraid of the budgets as it restricts our spending ways and imposes frugal lifestyle. Actually, it prevents us from overspending on less important items. A good budget helps us to focus on the things that are most important and eliminates the wasteful expenditure. Young and energetic people, who are in the aged between 20-and 30, overspend on partying which drains at least 20% of their income. This golden fund could be effectively used to build a better future. Another wasteful expenditure is online shopping. Before we embark on the wasteful expenses let us study our expenses and check how to cultivate our saving habits.
Tracking our expenses:
Our expenses are of two types one is fixed and the other one is variable. Fixed expenses are those that do not fluctuate every month. Fixed expenses include expenses such as rent, insurance, dues, salary to the maid and subscriptions. However, some expenses vary on our usage such as petrol bills, restaurant bills, gifts and laundry bills. One has to understand that some expenses occur once a year such as renewal of health or vehicle insurance, festival related expenses, dental cleanings, school fees, and most importantly the festival time expenses which include buying new clothes, and vacations.
Once we meticulously write down our expenses we will know how to control them. You may be surprised that most of us do not know how much we spend on different heads of expenditure. Let us first map it down.
Setting limits to our expenses:
Once we map our spending habits it becomes much easier to cut down the wasteful expenses. To make those cuts, we have to first start with the big expenditures usually it’s on rent and mortgage payments. We will have to check if we can lower our rent or mortgage payments by refinancing or moving to a smaller apartment or living with our parents. Typically, we will have to bring down our rents to about 15% of our salary. Ideally, rents and repayments (which include repayment of vehicle and apartment loans) should not exceed more than 40% of our salary. Besides, we have to restrict our life insurance cost to around 3% of our income, food and groceries to maximum 8% of our income. We have to monitor each and every expense so that it becomes a part of our system. This exercise should help us to save at least 15% of our salary and add it to our retirement nest.
Budget –Keep it flexible:
Initially, you may use excel sheet to record all your expenses before moving on to more complex system; you will have to review the expenses once a month to track the unnecessary expenditure. If you stick to a budget, you do not have to worry about credit card or loan repayment. Effective budgeting will ensure that there is enough money in the bank to pay back the housing loan and meet other financial commitments. Budget can be a useful tool in financial planning by allocating the capital to various expenditures in the beginning of the month. Shortly you will know your spending pattern and where you waste your money. Your savings pattern will allow you to draw up plans for short-term and long-term financial goals, such as a vacation, purchase of a new car or your child’s education. However, do not make the budget too ambitious or impractical to follow. Of course, experience will help you to improve the system to suit your needs.
Once you have implemented budget is relatively easier to grow your money effectively-which is the objective of the whole exercise.
In this article you have learnt the important tool of controlling your expense. Let us learn to use and benefit from it.