By the end of this week, you will be inundated with ‘resolutions’, ‘budgets’ etc. So obviously this is one more attempt. I know many young couples struggling to make a budget, then not liking what they are doing and soon abandoning it. Some others of course, have not even made a start and they keep telling themselves ‘what is there to write, WE KNOW what we are doing’. Actually budgeting is about making sure that your BRAIN does not cheat you into believing that you are on schedule. It is about knowing that your Brain is your investing enemy.
We are at the end of the Festive season – the Navratri, Diwali, Christmas shopping are all over, budgets stretched, and the company HR mail asking us for ‘investment proof’ is lying unopened in our inbox. Time for some introspection?
Well, change the way you budget. When you see your take home pay, see what are your goals and how you will allot that money. Lets look at a typical case – married couple in their 30s, married 5 years ago, not decided about kids, living in a house paid for by parents (so no rent, just paying society maintenance), take a vacation every quarter, and one foreign trip a year.
Take home pay: He: Rs. 94000 She: Rs. 88,000 (and a quarterly bonus of Rs. 50,000 most certain)
Repay his student loan: 14,000
Car loan (she is paying): Rs. 28000
Retirement oriented saving: PPF+ Sip He: Rs. 23000 She: Rs. 3000
‘F you fund’ for leaving the job: He: Rs. 2000 She: Rs. 33,000
Buying a house fund: He: Rs. 13000
she also does on recurring deposit of Rs. 5000 a month for creating an emergency corpus. In fact that corpus is now overflowing with Rs. 300,000.
They pay Rs. 22000 as salaries for a maid, cook, and a part time driver.
When you do such an exercise, and find that you have prioritised your investments, there is no stress at the end of the month. Suppose you have Rs. 3400 excess, YOU need not wonder where the money should go. You are clear that you are creating a ‘must buy a house’ fund, and a ‘retirement’ plan. Clearly this couple is not planning a kid – and that saves a lot of effort and time apart from money.
So pay yourself first (http://www.subramoney.com/2013/12/pay-yourself-first-means-what/) and you will know how much you can spend. You have ALREADY paid off the retirement plan, house plan, F U fund to leave your job plan – and clearly these are the priorities for you. What is left is to be used for expenses. Rarely will you go and change the SIP amount. And if you use an auto top up you know that all your goals will be met.
I do realise that I took a very easy example of a well earning couple with a house as a gift, and not planning to have a kid. You may not have it so easy. Maybe you are supporting an old parent? maybe you are paying the college fees of a younger sibling? Maybe if you start implementing this approach next month, it may not be possible to achieve your targeted savings amounts right away. Fairly obviously it will not happen overnight. If this is the case, develop a plan to slowly increase savings/ investments to the necessary levels over a period of months, which help you in reducing spending slowly and not disrupt your lifestyle. And if you still like crunching the numbers and seeing your consumption trends over time, budgeting apps are available. You can also automatically track spending against those goals to let you know where you stand at a given point in time.
Now SUPPOSE you get to the end of the month and you have excess funds available!!
Rather than worrying about whether you should be saving or investing more, paying down more of your loans, or adding to your cash reserves, you know that you have a well created and written down financial plan and are confident about spending on the things you want. It also allows YOU to take the plunge and pay for experiences that you might not have otherwise.
You are wondering how to make this plan work? http://www.subramoney.com/2016/09/how-to-make-pay-yourself-first-work/
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