9 TIPS How to Manage Your Finances in a Systemic Way
Earning money is important but safeguarding and managing it wisely is even more vital. Managing one’s finances systematically is very crucial. Planning and budgeting are important aspects of managing one’s personal finances. Managing finances is not rocket science. It is just that one should have the will, devote some time to it and have some basic knowledge about the different options available for savings and investment.
Laura D. Adams, personal finance expert and author of the famous book,“Money Girl’s Smart Moves to Deal with your Debt,” quotes, “If money management isn’t something you enjoy, consider my perspective. I look at managing my money as if it were a part-time job. The time you spend monitoring your finances will pay off. You can make real money by cutting expenses and earning more interest on savings and investments. I’d challenge you to find a part-time job where you could potentially earn as much money for just an hour or two of your time.”
The above advice by Laura D. Adams explains it all.
We can come across many people who may have astronomical earnings but are clumsy in managing their finances.
Managing personal finances can be done systematically keeping in mind the following points:
1. Budgeting is the most essential step in managing one’s finances. One should take into consideration their monthly earnings and plan their household and other expenses accordingly. Overspending will be disastrous in the long run. Depending upon one’s income, one should judiciously set aside a part of his or her income as savings and also put aside some money in investments that have growth options. Experts suggest a 50/30/20 ratio, i.e., about 50% of your net income (after taxes) should go towards routine household expenses such as groceries, rent, utilities and transport; 30% can be allocated for discretionary expenses such as dining out, shopping for clothes, charity, etc., and 20% should be kept aside for savings, paying down debts, emergency expenses, etc.
Savings can be in the form of bank deposits, public provident fund (PPF), post office deposits, mutual funds, etc., and investments can be in stock or non-liquid assets such as house, gold or land.
Keeping a sizeable amount as “emergency or contingency fund” is extremely important.
2. Being aware of one’s financial goals: One needs to list down their financial goals as it will help to plan and manage one’s finances. The financial goals can be one or many. Some of the common financial goals are listed below:
- Wealth maximization.
- Setting aside money for child’s higher education, marriage, etc.
- Augmentation of income, i.e., additional source of income other than the primary income source.
- Planning for the autumn of life, i.e., after retirement.
Read also: A Beginners Guide to Systematic Investment Plan
What is an emergency or contingency fund?
Emergency fund or contingency fund is the money that should be kept aside to meet contingent or unexpected expenses such as medical expenses, job loss, sudden death of an earning member in the family, etc. The emergency fund should cover expenses such as rent, EMIs, food, children’s education fees, utilities, insurance premiums, etc. The amount of emergency funds required for an individual depends on various factors such as the number of earning members in the family, number of dependents, the earning member’s nature of employment (whether job loss is prevalent in that particular employment sector), dependents, other investments, etc.
The thumb rule by experts is to set aside an amount equivalent to least 3 – 6 months of your salary in an investment option that provides liquidity in case a situation arises where there is job loss and other uncertainties. If there is only one earning member in the family, then it is advisable to keep aside 6 months of salary. If an individual has a secure employment with high job security, then he or she can set aside a smaller pool of funds, say for 3 months.
To meet the emergency expenses, keep some portion of your emergency fund in hard cash at home, say around 10 days’ of expenses in cash. Other than this, to meet higher emergency expenses, some part of your earnings should be in the form of liquid assets where you can easily convert them into cash. Some of the examples of liquid assets are stocks (shares that you own), savings and current accounts in a bank, mutual funds with a liquidity scheme, fixed deposits, etc. Fixed deposits, also called as time deposits, come with the flexibility of various time period options and you can choose one according to your requirement.
3. Do some research: Research the various savings and investment options that are available.
a. Make it indispensable to invest in medical/health insurance: Nowadays, health issues arise even at a very young age due to the stressful lifestyle that most of us lead. Setting aside a considerable chunk of your earnings to meet the unpredictable health related expenses is of prime importance as it will help you to tide over the sudden and unexpected challenges in the event of hospitalization. The best way to protect yourself is to sign up for a medical/health insurance that may cover a maximum of 80% of your hospitalization expenses, subject to the norms of the insurance company. You must have read and heard several stories where the fate of the entire family has turned topsy-turvy due to high hospital expenses, which they were unprepared for. There have been stories where families had to sell land and property to meet medical expenses. Medical insurance is a life-saver in such situations.
b. Go for recurring deposits: This will inculcate the culture of saving a part of your earnings in a regular and systemic manner. Recurring deposits require a certain amount of money to be deposited in the recurring deposit account every month. Children should be introduced to this kind of a scheme by encouraging them to deposit a small part of their pocket money into such a scheme. Minor accounts can be opened in banks under the guardianship of parents or legally appointed guardians.
c. Invest in post office savings: It is a very secure form of savings. This way you can be sure that your money is safe. Of course, the returns are less, but there is only negligible risk. There are various options available such as savings account, fixed deposit and recurring deposit. If you would like to put aside a specific amount of money as savings every month, then you may go for the recurring deposit option. The interest rate is higher in this case when compared to savings and fixed deposit options.
d. Invest a part of your earnings in tax-saving mutual funds: Research for funds that offer two-pronged benefits such as tax-saving benefit plus growth in investment. ELSS (Equity Linked Savings Scheme) – growth option is an example of one such fund. You can also go for dividend options which will give you regular dividend payouts and income from dividends are tax free up to a certain limit. The flip side is this is a close-ended fund, where your investment will be locked in for three years.
e. Try your luck in stock markets: If you are ready to take risk in order to increase your returns, then you may try your luck in stock markets also. But make sure to invest only a small part of your income.
f. Flexi fixed deposits: Experts suggest that you can set aside a part of your contingency corpus in Flexi fixed deposits. This is a combination of current account, savings account and a fixed deposit, which offers greater flexibility in terms of tenure, competitive interest rates, liquidity and premature withdrawal option. These can be linked to your savings bank account itself. They not only offer higher interest rates but they also do not show up in your savings account which eliminates your urge to exhaust the funds. Always choose nationalized or large private sector banks over co-operative banks as they are much safer.
g. Use credit cards wisely and limit your debts: Last but not the least, use your credit cards wisely as these can be major debt traps. Make sure to make your payments on time in order to avoid huge interest and penalties for late payment.
Read: 17 Types of Credit Cards, Pros & Cons of Credit Card
One more important point that you should remember is to limit your debts: “Don’t spend more than you earn” should be your motto. But, it is inevitable that loans have to be taken when investing in a property such as house. Keep in mind that you should have enough money to pay from your own pocket the minimum 20% down payment that is required and your salary should be sufficient enough to pay your monthly EMIs without cutting into your monthly household expense budget. Go ahead with the investment only if you are sure if you will be able to fulfil the above criteria.
Also Read: Investment Options in India
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