By Amar Pandit
Anushree is a 25-year-old fashion stylist at a leading fashion magazine. She earns a competitive salary and has fixed a personal goal of saving at least 20% of her monthly salary. She recently bought a new car and is currently paying the EMIs. She also spends a part of her salary towards rental and living expenses. Apart from this, Anushree loves to shop, often indulging in shopping sprees. She also enjoys a vibrant social life. However, at the end of the month, Anushree often finds herself struggling for liquidity and can hardly save any portion of her income. Sounds familiar? I am sure just like Anushree, we all at some point in time have struggled with the month-end blues where our bank accounts don’t necessarily agree with us.
We live in an era of unprecedented opportunities and income levels. At the same time, we also have more ways than ever before to consume and spend, which makes that one basic financial rule all the more important: “Plan Your Finances”. With this rule always in sight, it is easier to keep the money you earn, without sacrificing the good life.
So, how do we tackle these blues? Does the battle against this month-end peril includes compromising our current lifestyle?
Most of us follow the habit of first meeting all our fixed as well as variable expenses and then save what is left at the end of the month. This is called ‘Maintaining an expenses budget’. However, we recommend an alternate route – ‘Maintaining a savings budget’, i.e. set yourself a savings target of 15-25% of your income, and move this amount to a mental account called ‘My Road to Riches’. This money should be deployed productively in investments, whether cash, debt, equity, or real estate.
Then you will have only 75%-85% of your income for your expenses. Out of this, first you should pay off your mandatory expenses such as EMIs, insurance premium, rent and so on. Post that, the balance income can be used for other purposes such as shopping, parties, entertainment and so on.
If you follow this plan consistently, you will surely end up wealthier and safer than even people who earn more than you. This is the principle of ‘Pay Yourself First’.
Keeping money is as important as making money. What you do with your income today determines what you can do with it tomorrow, whether it goes up or down. It’s just not productive to think, “I’ll definitely start saving when I make more money” or “I don’t make enough to save, so I should first concentrate on increasing my income”. Start by giving savings a priority. It will make a big difference to your future.
(The author is CFA and the Founder & Chief Happiness Officer at HappynessFactory.in)