Financial Planning : How to save money for your financial goals?

Financial planning

 

Financial planning’s major goal is managing your expenses and surplus. Now let me help  you how you can plan and manage your expenses in a organized manner. To manage your expenses, you need to have a expenditure plan in place, which can be achieved by preparing a monthly budget. For most, a budget might sound boring but sticking to it pays rich dividends in the long run. Preparing and following to monthly budget will help you to keep control on your expenses and generate the surplus required to achieve your financial goals. Once you start maintaining the budget regularly, it would not be a cumbersome task but rather would become an enjoyable activity, which you would look forward to perform monthly. You will have a sense of accomplishment once you realize that you can stick to your budget and are in control of your expenses!

 

 

Preparation of a budget involves the following key steps:

 

1. Note down your monthly income from various sources like

salary, profession, business, investments, etc.

2. Note down your monthly expenses under various heads

like Household, Food, Personal, Rent, Taxes, Loan

Instalments, Entertainment, etc.

3. Estimate the future expenses that you may incur under each

expense head based on your experience.

4. Track the actual expenses incurred under each head

5. Analyze the deviation between estimated and actual

expenses and take corrective actions

Monthly Budget   

While preparing your monthly budget, you need to note down, the

estimates of monthly income from various sources and monthly

expenses under various heads of self and family. If your family has

other earning member(s) (E.g., spouse) include income of these

earning members as well while preparing your monthly budget.

Since income and expenses are not constant but dynamic in nature,

basis your experience, you may estimate the amount of monthly

income and expenses for the purpose of preparing the budget. Some

professionals may have variable income levels; in this case, you

need to consider your best estimates of average monthly income

based on your experience for the purpose of preparing your

monthly budget.

Monthly Budget will help you estimate your monthly income and

expenses and track the deviation between the estimated and

actual expenses. With this, you may be able to track excess amount

spent and would be able to take measures to control expenses in

future. You would also be able to review the surplus available

(Surplus = Your Income minus Your Expenses) to invest for

achieving your financial goals.

The truth of life is that we have limited financial resources i.e., income

level but virtually unlimited aspirations. You need to classify your

aspirations into Needs and Wants. Needs signify something which

you and your family cannot do without; these include nondiscretionary

expenses like food, clothing, rent, utility bills, etc.

Wants to consist of discretionary expenses like entertainment, dining

out, etc. which usually are not very pressing.

As you plan for your various financial goals, you may be able to

assess the amount of surplus you may require saving and invest for

achieving your financial goals. If the required surplus is more than

the available surplus, then you may plan to temporarily reduce /

sacrifice some of your discretionary and non-pressing expenses to

elevate the level of surplus which will help you achieve your

important financial goals. In this process, you may have to let go on

some of the short-term gratifications to achieve your long term &

important financial goals. Upon achieve your financial goals, you

would realize the importance of budget and would be glad that you

maintained one!

 

Do’s and Don’ts

• Do set realistic estimates of your expenses. It is important

to keep some extra cushioning for unforeseen expenses

and to stay motivated to track your monthly budget.

• Keep daily record of cash expenses else you would find it

difficult to track the same. You may refer to your Card and

Bank Statements for non-cash expenses.

• Do pay your utility bills, loan instalments, credit card dues

and taxes on time so that you avoid paying penalties.

Do subscribe to mobile, internet and television plans that

match your needs and avoid paying for any extra and value

added services that you may not require.

• Do consider downloading eBooks’ if you like reading as

they may cost lesser than the paperback versions. If you

are an avid reader, you may join a library which will give

you access to thousands of interesting books at a very

economical cost.

• Do invest in your health and stay fit by following a good

diet and exercise routine. Not only would you save a lot on

medical costs but also be able to enjoy a longer and

healthier life!

• Do evaluate periodically if your job is paying you as per the

industry standards. If not, you may negotiate with your

employer for a pay hike or search for a better paying job.

• Do keep your knowledge and work skills updated. If

required take refresher courses. This will help you to not

only secure but also progress in your job / profession.

• Do try to make extra money leveraging your knowledge

and expertise. You may start a part time consultancy

services or even consider freelancing if you have the expertise in

your work domain.

• Do start investing the surplus regularly. Keeping the

surplus into your bank account will not yield much returns

and you might tend to spend the same on not so important

things.

• Do not over-use your credit card and do pay the dues on

time. Avoid having multiple and higher limit credit cards.

Instead, you may switch to using Debit Card which will

restrict your spending up to the availability of balance in

your account and thus avoid overspending and additional

loan instalments.

• Do not get carried away by latest electronic gadgets like

mobile, laptop, home appliances, etc. Evaluate if you really

need to get the latest upgrade available. Your existing

product might be enough to satisfy your needs.

Do not buy stuff impulsively just because there is a

discount offers available. Buy things only if you require

those.

• Do things which you can easily do it yourself (DIY) instead

of engaging someone else. Like maintain your garden,

fixing-up a leaking tap or a broken chair, painting a wall,

etc. This will help you save some money to

generate additional surplus.

• Do keep a check on your discretionary expenses like

entertainment, dining out, etc. However, do not completely

eliminate discretionary expenses as these are required to

rejuvenate and stay focused on work. You may reduce the

frequency of such discretionary expenses if required. E.g.

reduce the frequency of attending concerts, events or fine

dining; take more economic mode of transport like bus or

train to travel instead of using your own vehicle; use a car

that is more economical and lower on maintenance.

 

Key Money Drainers

Given below are two key money drainers. These money drainers,

significantly reduce your potential to save money and thus impact

your capacity to invest and achieve important financial goals.

 

I - Loans

Considerable amount of the income is usually spent in paying the

monthly loan instalments. It is prudent to avail loans which help you

build and own assets like that of a housing loan but avoid availing

loans for meeting your expenses like that of credit cards and

personal loans. Typically, credit cards are used for shopping and

subsequently the amount due is converted into loan installments

which attract higher interest rate. The interest charged on loan is

your expense. Our aim is to reduce this expense so as to generate

more surplus for the purpose of investment. Consistent efforts are

required to pay off the loans with higher interest rate like that of

Credit Card and Personal Loans with the help of debt consolidation

& balance transfer processes explained ahead in 'Managing your

Loans' chapter of this book. These loan management processes

shall help you avail loans at lower interest rates and also reduce the

monthly instalment payment by adjusting your tenure so that you

have more surplus for the purpose of investment!

 

II - Discretionary Spending

As explained earlier in this chapter, discretionary expenses are non-pressing expenses like entertainment, dining out, gifting, shopping for lifestyle goods like mobile, watches, jewelry, perfumes, electronics, etc. It is important to evaluate the percentage of your total income being allocated to discretionary expenses. If you have high expenses, then the high percentage of discretionary spending may be one of the root causes for this. We certainly cannot avoid discretionary expenses however, we can allocate a budget for controlling such type of expenses so that it does not impact the required savings and surplus for investing.

Budgeting is the basis of generating the surplus required to fund your financial goals. Think carefully about what you spend your money on –  do you really need it? You may be surprised to know that even if you try out a few Do’s and Don’ts listed above and especially focus of the key money drainers, you could easily save and fund for a few of your important financial goals!