Your financial plan is likely to remain powerless unless you convert a bigger chunk of your discretionary spending into investments.
Quite often we do not appreciate the importance of crafting a smart household budget. It is all about documenting your monthly spends and it gives you a clear idea of whether you are overspending and where you can cut down on. Your financial plan is likely to remain powerless unless you convert a bigger chunk of your discretionary spending into investments. Given a choice between spending and investing, it is investing that must win. Remember the old piece of financial wisdom that a penny saved is a penny earned. Here is how you can actually go about converting your discretionary spending into valuable investments.
1. Target your savings first and then start spending
Rethink the way you create the household budget. Instead of budgeting your expenses and then working out your savings, go the other way round. Once you budget expenses, classify into urgent and deferrable expenses. You cannot avoid urgent expenses but deferrable expenses are a matter of choice. Let us start a little differently. Once your long-term objectives are set, set your investment target for each month. Any SIP calculator will help you. The residual cash should then prioritized and spent.
2. How much can you cut expenses; but you can surely get better deals
How do you spend your discretionary flows? Once your basic home needs are taken care of, you spend on movies, eating out, shopping and travelling. What is interesting is that in each of these headers you can save a ton of money by forcing deals. Check out the best deals on movies that you can get from various banks and digital payment modes. You will save a good deal each month. While eating out, make the best of discount coupons that you get online on a regular basis. You can get more for less. Before booking your travel tickets or spending on clothes, make a comparison online and check out for flash sales. There is a lot of money that you will save by simply not overpaying.
3. Strike hard bargains on your loan payments
The only truth in the world of finance is that nothing is irreversible and nothing is non-negotiable. From rental payments to the commission to brokers to EMI on your apartment, everything can be worked down if you bargain hard enough. Reduce your petrol bills by opting for shared cabs or metros which are equally comfortable and save you a lot of money. When you add these up, the impact is significant.
4. SIPs are little drops that make the ocean; so persist
Often people wonder: I save and squeeze and do what. The outcome of what you do with the money is equally important to convince you of the logic of saving and investing. Sit with your financial advisor and evaluate how your savings have grown over a period of time. For example, if you can squeeze another Rs 2,000 per month and invest in equity SIP at a conservative 12%, you will end up with a corpus of around Rs 20 lakh in 20 years. Now that is real perspective and will force you not to underestimate the power of small savings.
5. Sell the story to your family members too
Take a simple example. We saw above that putting just Rs 2,000 per month in equity SIP would grow to Rs 20 lakh in 20 years even at a conservative return of 12% per annum. Anything above that (as is very likely) is a bonus for you. But that is not the point. Explain to your children that by saving Rs 2,000 per month and reducing the number of times they eat out, they can create future value of Rs 20 lakh. That almost pays for 2 years of their education at the best Ivy League universities. That will be a lot simpler for your kids to understand and identify with.
(By Ketan Shah, Director and Chief Revenue Officer, Angel Broking Ltd)