One of the key aspects of creating a successful financial plan for a year is to establish a workable home budget that deals with your expenses, manages your debt and also builds your savings at the same time! A home budget can be defined as a plan that pre-determines your spending goals, spread over a certain period of time (in this instance, 1 year).

your income and cash flow

To chalk out a workable home budget, your income is the first thing that you need to consider. It must include all forms of income that is being received by you, like your pay cheque; interests and dividends that you earn from investments; tax refunds and gifts too. When you are calculating the “Cash Flow”, you however need to consider your expenses too – both anticipated expenses like food, conveyance, loan payments, taxes, supplies etc. as well as the unanticipated ones like medical bills and car repair costs. The incoming and outgoing money in your household is your cash flow. Good home budgeting can better your cash flow, i.e. will help you ensure more inflow and fewer outflows while reckless spending can do just the opposite! The bottom-line therefore should be to successfully manage and tackle the cash flow.

Home budgeting tips

Manage your home budget by tracking all the income/expenses that have occurred in your household month on month to figure out the bigger picture for a whole year! This will help you understand your weekly, monthly and annual cash flow and provide you with a good understanding of how your money is spent and saved! You will notice an improvement in savings with the progress of each month, as the stringent tracking of expenses will help you take a disciplined approach to excessive spending!

Once you understand the patterns of your income and savings graph you will be able to forecast your expenditure for the upcoming year, set new goals with regard to repaying your debts, planning your investments and improving your savings! To secure your finances for the future it is important that you save a minimum of 5-10% of your income every year!

Your sample home budget checklist

Mortgage/Loan repayments

Groceries and supplies

Utilities

Children’s education

Insurance premiums

Car/ Gas maintenance bills

Communication expenses like phone bills, cell phone bills, internet and cable TV charges

Subscription charges

Medical expenses

Entertainment costs

The reason why ‘Entertainment’ finds a place right at the end is primarily because this needs to the first to be sacrificed in a month where an unplanned or emergency expense crops up!

Paying the bills (even if you are not working and everything is being paid for from your spouse’s money), must be a prerogative for both the partners. Remember that you can chalk out a workable home budget and better the prospects of your family’s financial planning only if you have a clear-cut idea of the financial dealings that you need to make every month.

Emergency fund

The most successful of budgets always includes a contingency fund or an emergency account, to meet the unexpected costs that may arise in a household due to unforeseen events like a job loss for instance! Anywhere between 2 and 6 months of average income must always stay intact in this account.

The concept of green homes is a trend that is here to stay and is slowly but surely catching up in India. In the modern version of living, cities, towns and even villages are witnessing an increased preference towards building homes and creating an environment that contributes to the preservation of the ecosystem.

As far as application of this thought process to modern homes is concerned, the primary motivating factor that seems to help in making some positive progress in this direction, is the fact that going green can give home owners the ability to save on living expenses. Everybody who has lived in big towns and cities knows that life here can get overwhelmingly tough. It is not just the struggle to bring food to the table but also the desire to live comfortably. This is the reason why today every home has an AC, a refrigerator and so on. People don’t want to compromise on comfort but at the same time they don’t want to end up paying hefty energy consumption bills!

Green homes help such home owners get the best of both worlds by helping them cut down significantly on living expenses. By adopting green practices and by exercising the green philosophy, home owners can actually build on their goal to save.

Both builders and buyers are more aware of the benefits of going green, than ever before! Home owners in particular are seeing results in the form of reduced monthly expenses. So, everyone who is part of the equation is reaping benefits and this is reassuring to green enthusiasts who are trying their best to promote and sustain their efforts to build a greener planet.

As far as durability of home and home interiors go, the concept seems to play a big role. Homes that are built from green materials as part of building and furnishings tend to last longer and create significant real estate value. For instance, windows and walls that are designed and built to sustain this concept, don’t let outside temperature alter the conditions inside. For instance, one of the green concepts includes circulating water pipes sandwiched between two walls running all around the house. This keeps the interiors cool thus negating or limiting the need for an air conditioner. Also, the AC and appliances like the refrigerator function on optimum mode and expend less energy due to the cool environment, which shows up as significant savings on the bill!

When does a house become a green home?

When great care and attention is taken to optimally utilise energy and other natural resources for the healthy functioning of a house hold a house can qualify as a green home!

In India a building is certified as green when it is rated by Leadership in Energy and Environment Design, India advocated by Indian Green Building Council and The Energy and Resource Institute Green Rating for Integrated Habitat Assessment. These systems have been created to award ratings based on the concept of design, construction and impact on the immediate environment. Accordingly a building can be certified with a gold, silver or platinum rating depending on how evolved it is on the green parameter.

Is going green more expensive?

Specially treated construction materials and innovative systems have to be painstakingly incorporated during the construction stages to help achieve the objective of optimal use of energy, managing waste, optimally utilising renewable resources like water. For instance green homes might use high performance glass among other innovations to keep the interiors cooler or LED lighting that is three times the cost of normal lighting might be used to create an energy-efficient environment. However take heart from the fact that even if initial costs seem high, you will start recovering it within a couple of years of usage due to the enormous amount of energy-saving and reduction. Remember that every green element need not be expensive, you can utilise a number of low-cost construction methods to enable significant energy-saving as well. An ideal green home should be a combination of various methods, both expensive and inexpensive!

Here is a sample of possible green elements that can be part of your house construction!

Solar heaters: These use solar panels to optimally make use of sun rays to heat the water collected in an insulated tank. Depending on the capacity of the tank and water usage, you can heat water if there is sufficient sunlight just twice a week for a week’s water supply!

Benefits: This directly reduces the consumption of electricity worth rupees 600- 800 a month and helps recover installation cost in the span of 3-5 years. The cost of installation can amount anywhere between 7,000-12,000 Indian rupees.

Photovoltaic Panels: These use the energy from the sun to store electricity! You can actually live off the grid without any power supply if you integrate these panels with your building structure and create sufficient back up.

Some low-cost construction methods that help keep interiors cool during summer:

Thick walls with cavity: Such walls use up less number of bricks and leave a cavity within the wall and help in keeping the interiors cool.

Another effective low-cost construction method involves usage of soil and cement instead of just bricks to ensure nearly 15-20% cost saving and a cooler home!

Filler slabs and pre-cast elements for roofing is yet another effective construction method utilised for building roofs, which also help in keeping the interiors cool and results in 25% cost saving!

Rain water harvesting is a key element in renewing a water resource and helps in reaping long-term rewards and significant cost savings! This is nothing but an effective way to collect rain water and utilise it. This can be added as a provision in already constructed homes or incorporated while construction happens.

Though the concept of green homes is still in its nascent stages, many real estate authorities and builders are utilising the concept to educate their customers and use the same as a promotional tool to up their sales!

Exercising discipline is extremely important in every aspect of life. This cannot be more stressed in the case of managing your money. The manner in which you manage your expenses is the key to reduce liabilities and save more. According to a famous trading and investing legend- One must not spend time looking for the Holy Grail of investments or trading systems. It doesn’t exist. The Holy Grail is within you. It’s not the investment that’s going to determine success or failure rather it’s the discipline of the investor.

There are 2 friends Mr. X and Mr. Y both in their late 20s. Mr. X has a monthly income of Rs. 60,000, while Mr. Y has a salary of Rs 40,000 per month.  However, Mr. X’s job is more stressful and demanding; while Mr. Y has a comfortable job with low stress levels and better work life balance.

Mr. X lives a lavish life. He spends most of his salary; saves inconsistently. On the other hand Mr. Y is very regular in savings. From his monthly income, he saves Rs 15,000 a month in the following investment options.

Pension - Rs 3,000; Child plans -  Rs 2,000; Mutual Funds -  Rs 4,000; Emergency fund -  Rs 1,000; Vacation fund -  Rs 1,000; PPF – Rs 2,000; Mediclaim-   Rs 2,000

Suppose at the age of 44 years, both have a medical emergency. Due to lack of savings Mr. X would be stumped. However, in case of Mr. Y, his saving patterns, as visible below, would be able to save the day and give him the ability to meet the sudden expense.

One can never predict life. It’s difficult to anticipate bad times. Hence, it is essential to save for such rainy days. One should make it a habit to save, even if it’s a small amount.

Here are some steps which one can follow.

Track expenses: This is the foremost step. You should keep a check on monthly expenses. Unnecessary expenses should be avoided. One way to know how much one spent for a month is by having a monthly budget. This will show where the money is spent and also regulate the cash flows. This done over a period of time will help you identify areas where there is room to cut back on spending and save money. This will free up cash, which can be used to pay up existing debts or help save for the rainy day. Reducing spending, as opposed to earning more money, is the real key to gaining control of finances. Also, you must ensure that some money is set aside to cover monthly expenses for at least three months. These funds should be set aside such that can be readily accessed in case in times of emergency or as a contingency fund.

Pay off debts/ credit card debts: Paying off your debts early is one of the best investments you can make, specially paying off debts which have a high rate of interest.  This includes the credit card payments which generally have higher interest costs.

Create discipline: You need to have discipline in the way you spend and control your expenditure. It is the key to save. A consistent plan of saving and investing helps attain one’s goal. With discipline and time one can reach goals.

Importance of saving: Here is a simple example. There are 2 friends, Mr. A and Mr. B. Mr. B saves Rs 500 per month. Mr. A saves nothing. Over the years, here’s what happens.

The discipline of saving regularly has helped Mr. B be richer by Rs 19, 931. Also what you earn is not as important as what you save. If you spend everything you earn in futile pursuits and wasteful expenditure, then there is no point to the amount earned.

Invest: Start the wealth building exercise by investing in low risk investments. Once the base is strong, then increase the risk exposure by investing in higher return investments. Also, do not put all the eggs in the same basket. Your risk tolerance level goes a long way in defining your investment approach. However, do remember your investment objectives before you subscribe to an investment plan.

Follow a systematic investment plan: Invest at regular times. By doing a SIP, you can SIP (sleep in peace). This will help you reduce the cost and earn higher returns in the long term.

As seen in the case of Mr. Y, by saving regularly helped him meet the medical emergency with ease. By following these simples steps, you can make your money last longer!

When we talk about credit card usage we find different people managing it in a different way. Some people are highly disciplined and never default on their monthly installments and others are so messy that they are always on the top of the defaulter list. Managing finance is a complex task and it’s very easy to fall into a debt trap if you misuse the power of free credit. Credit card provides you the power but it never suggests that this power is unlimited. You have to pay the dues back at the end of the free credit period but somehow the human mind doesn’t listen. To avoid getting into trouble in future it’s advisable to understand your credit personality and choose the credit card which suits you the best. Credit card companies provide credit cards with different features like different interest rate, different reward structure, different credit limits etc. If you understand the way you deal with credit it gets easier to choose the best combination for you. Let’s see what kinds of credit personalities exist and what card they should opt for.

The Beginner

You are just out of college enjoying your first job. You never had surplus money and hence no financial planning was required. You have never used credit previously and find the concept amazing. As expected, you are in a hurry to apply for one.

For beginners it’s advisable not to go for cards with high credit limits. You still do not know how you are going to use your card. Your financial wit has never been tested so better be cautious. This is just the beginning and once you are sure that you can manage your finances well, you can opt for credit cards with a higher limit.

The Disciplined

You have been there and done it all. You are great at financial planning and almost everything is in perfect shape. You never default on your monthly payments and never spend beyond your means. Reward offers don’t alter your spending pattern and you plan every move before executing.

For the disciplined the best suited card is one with cash back facility and good reward structure. The reward points should accrue irrespective of the type of purchasing done and can be redeemed at one go. Interest rate on your card doesn’t matter much as you always pay on time.

The Carefree

You love spending and believe that spending is the motivation for earning. You plan things beforehand but don’t mind going overboard at times. You cross your spending limit at times so you don’t make full payments on your credit card.

The most important feature which the carefree should look for in a credit card is the interest rate. As you carry forward the balance your interest expense is going to be high. It’s advisable to choose the card which offers the lowest interest rate. You should also make sure that your card does not have any annual maintenance charges attached to it.

The complete mess

You don’t understand financial management. Almost every time you do not even pay the minimum amount due on your credit card. All the customer care executives of the bank know you by name and are in constant touch with you. You always end up paying heavy interest and late payment charges.

For the messy it is better to use prepaid cards as it will save a great deal of money which you pay in the form of interest and various charges. This will prevent you from spending beyond your means.

The Credit Fearing

You never wanted a credit card in the first place. According to you being in debt is a crime. You applied for the card just because it made your life easy in some scenarios like booking air tickets and overseas purchases. You only swipe it in some kind of emergency and it goes unused at times for months.

The best card which will suit your needs is the one with no annual maintenance charge. You never make late payments and you are not a frequent user so interest rate and reward structure of the card doesn’t matter much for you.

Conclusion

There are a wide variety of credit cards available in the market and it’s not possible to research all of them. The better approach in such a scenario is to research your personality and then research the cards available. While you define your personality you get to know the basic traits your card should have. Once you are sure about the traits the list of cards automatically gets shorter. The best approach is to talk to the bank and discuss with the executive regarding your needs and spending behavior. They will definitely guide you with better options as banks are getting more and more cautious about their relationship with the customer. The existing competition in the market compels them to give better services to their clients. Rather than doing the entire math yourself, put forth some direct questions to them, which will help you make the best decision.

Once while chatting up with a friend over tea and hot pakoras, the talk moved towards how expenses have shot up and how difficult it was getting to manage our family budgets. My friend just shrugged and said, “Well, those are concerns of my wife. After all, she is the finance minister of the house”.

Yeah, most women don the role of the finance minister of the house apart from the cook, housekeeper, the errand girl and more! However, just like every government’s finance minister, the home based finance minister comes in different types too. Some are functional, some are innovative, some are aggressive and some are just nodding dolls. What type is the finance minister of your house?

All families can do well with an efficient and innovative finance minister and this is how you can become one:

-          First things first – by being organised

Four types of expenses happen in the household.

• Compulsory, non-negotiable expenses like the rent, school fees, groceries, electricity bill etc.
• Discretionary, variable expenses like eat outs, holidays, clothing and grooming, religious etc.
• Loan repayments
• Savings and investments

An organised finance minister has an almost clear idea of how much goes into each of these categories and allocates separately.  For example: EMIs are paid out of the husband’s salary account because he has to claim tax deduction for the same. Savings and investments happen out of a common savings account jointly held by husband and finance minister to give better control and flexibility. Compulsory expenses are settled at a specific time of the month always and paid using cash, debit card or in a disciplined manner the credit card. Discretionary expenses have a predetermined budget and are usually only handled in cash.

-          A creative finance minister will find scope to improvise in each of the above heads. Most compulsory expenses can be planned for.  Like, the school fee comes in the month of April/May and so it does every year. A bit of pre – planning can help tide over this big-ticket expenditure with ease. For regular compulsory expenses, the brown cover technique (where money required for every expense is neatly put away in their respective envelopes) is most useful. There are ways to optimise interest payments on loans. Good bargaining and searching for the best deals can help keep discretionary expenses also in control and many more…

-          Apart from the above, a smart finance minister keeps books of accounts, knows for sure how much the vegetable vendor owes her or how much advance the maid has taken that should be deducted from her monthly salary. Not from her memory which can be disputed, but in her books – clearly written with date, amount and if possible signatures.

-          A ready reckoner list with all payments to be made, to whom, how much, when, how long etc. should remain handy in the top most draw of her closet. Not a payment missed, not a day delayed, not a cheque dishonoured can mean a lot of saving in terms of interest, late payment fee, charges, penalties etc. And of course, an impeccable credit record too for the family and all those living in the house. (Btw, did you know  if a bank’s database shows up your address if a defaulter lives in the same house as you do – this cannot augur well for you – when you opt for a loan?)

-          How many instances have we seen that one person worries about the daughter’s wedding while the spouse fancies the latest model mobile phone / car? An instinctive clarity on what is important and what is not a great asset is crucial for the family’s finance minister. A focus on the family’s financial needs both short term and long term will help in prioritising savings and investments over impulsive, indulgent spending.

-          Just like how the country’s FM has to work together with the RBI governor, SEBI Chairman and others in the finance industry, the lady of the house needs to be friends with the banker, should invite the insurance agent for tea and network with the different people who are instrumental in carrying out the family’s investments, loans, insurances etc. This comes easily to most women and will turn out to be very helpful in getting the best deals and come good during the most unexpected moments

Overall, a well-informed, organised, diligent woman with clarity of goals and networking skills would make an amazing finance minister of the home. If you are reading this, you are on the way to becoming one. Good luck!

An Assumption on behalf of the reader: we all know that children need to know the ways of money and it should not be left to destiny or to be learnt by trial and error later on in life.

“what and how to teach your children about money” – Winston Churchill’s famously quoted – “I love to learn, but can’t say the same thing about being taught.”

With children and more so with teenagers it is never easy to “teach”, they simply don’t want to be taught. But they should just know. They should know about money.

Yeah, but what is that, they should know about money?  Your child should know that

-          Money is a scarce resource and has to be used judiciously

-          Money has to be earned and doesn’t come free

-          How much you want and how much you have will not always match

-          Money is really not everything. It is important but not the only

important thing in life

You’ve to get them to learn, by themselves in an easy and fun way, so they own it up, take pride and practise. And with something like money, which can be a bit tricky, sensitive and sometimes dangerous how do you do this effectively without sounding preachy?

The answer is a well designed and executed “Allowance Plan”! Give your children pocket money. Now, don’t jump off your seat. Read on…

Children who are ten years of age are ready for an allowance plan. Regular (monthly / fortnightly / weekly) allowance money can be given to them that they may use to handle some of their expenditure. How much money will depend on what all expenses they will handle.

For example: One could start with some basic expenses like say, snacks after school. The child may want to buy a drink or grab a quick snack from the canteen during or after school. Sit down with the child and find out how much he normally would spend on this snack every day. Let’s say he spends Rs.20.00 on the daily snack. For five days in a week he would spend Rs.100.00. So every Monday you could give him Rs.120.00 (20% extra for the child to use his discretion on what to do).

Now, it is simple, instead of giving him Rs.20.00 everyday or whatever he asks for now and then, you are giving him Rs.120.00 every week to manage his snack expenses. If, he tends to spend more on the snack because he has more in his pocket, well, he will learn that money is a scarce resource when you say “Sorry, this week’s quota over” if he wants a replenishment middle of the week. You could gradually increase the amount and the expenses he may handle himself.

The allowance could be linked to some chores in the house. All basic work, like putting away her books and keeping her room clean are to be done anyway and cannot be linked to allowances. But some work which generally children are not expected to do – like clean the insides of the car once a week / clear the table after dinner and put away washed vessels / soap and clean furniture once a fortnight can be linked to allowances.

You will have to insist that the work be completed 100% to be eligible for allowance. Shoddy work should not be condoned. A sense of seriousness has to be instilled in the process. This will teach the child that money has to be earned and understand that time and effort goes into earning money. But tread the line carefully so as to not permit the child demand money for small helps -  like you ask your child to make you a cup of tea after a tiring day, she shouldn’t be asking for money to do so.

Encourage the child to put aside money as savings for planned larger expenses like if her friend’s birthday is round the corner and she wants to buy a gift, she can put away part of her allowance starting 2-3 months in advance to cover up the extra expenditure. In any case she does get a bit more than what she absolutely needs. And sometimes skipping snacks or buying something less expensive is not too bad either. The 3 box idea is a good one too. Keep 3 transparent boxes and name them “SPENDING” “SAVING” “SHARING”.

The allowance once received is split between these three boxes, say Rs.100 for spending, Rs.10 for saving and Rs. 10 for sharing. The saving box is to be used for planned expenses and the sharing box can be opened and the contents donated to a nearby orphanage or animal care centre – whatever cause your child is passionate about. Make sure to collect a receipt in the name of the child and safe keep it. Imagine the child’s pride for having contributed her bit.

Tell the child what not to do with the money so earned. Like he cannot use it to buy anything dangerous or cannot use it to bully or belittle others. But do not tell the child what to do. He should be permitted to do what he wants within large boundaries. He can experiment with speculating or lending to others. If it goes wrong he learns from it. You may however want to review with him once a month what he has been doing and what he has learnt from it.

Whatever goes right, whatever goes wrong, learning is a continuous process for both you and your child. Enjoy the journey. But always remember – “Allowance is not the child’s birth right. It is only a tool to learn how to handle money”. With the right rules in place, the right amount of freedom and the right example set by personal behaviour your child will learn lessons on money that would stay for life. Good luck.

It is a good idea to categorize your payments under different headings like daily living expenses, entertainment and vacation, health etc. This will give you a fair idea of how much you spend on different categories. It is easier to keep track and also control your expenses once you know how much portion of your earnings goes into each expense.

Getting married? Starting a job? Getting further education? Starting your own family? Have you planned for these important phases in your life? Good control over your personal finances will help you achieve the goals you have set for yourself and cope with changes in your life. How can you achieve that? The answer is having your own personalized budget.

How do you draw a budget that suits your need? Say, you are interested in taking an educational course and are thinking of taking a student loan. How will you accommodate this additional expense? To begin with, you need to draw your personal budget.

- The first step is to calculate your monthly income. Consider income from all sources including income from your investments. ——- A

- Next, make a list of your monthly expenses. For example, if you are a salaried employee, list your routine expenses like expenses on commute, food expenses, utilities, clothes, charities etc. Then think of any extraordinary expenses that you may have to incur during the budgeted period, such as home improvement projects or purchasing a car. ——- B

- It is a good idea to categorize your payments under different headings like daily living expenses, entertainment and vacation, health etc. This will give you a fair idea of how much you spend on different categories. It is easier to keep track and also control your expenses once you know how much portion of your earnings goes into each expense.

- Calculate the difference (A – B = C).

- The next step is to redraft your personal budget to include expenses related to the educational course like interest and principal payment, course fees, expenses on tuitions and books, loss of wages etc. If you still have a comfortable surplus of cash (C), you can finalize this budget. If not, consider the expenses that you can avoid and reconsider the amount of loan. Once you reach a bottom line that you are comfortable with, finalize your budget.
- When you decide the cash surplus / short you will be comfortable with, you should also think of the percentage of income you would ideally like to save for your future. Think of short term as well as long term or retirement savings.

You may compile your budget into an excel sheet or use a physical book or diary. Alternatively, there are several free softwares available online for the taking.

Here are a few tips of a working budget:

- Keep your working sheet as simple as possible and keep it clean. Each item and category should be clearly defined.

- It is a good idea to create a flexible spreadsheet or if you have a hand written budget in mind, leave – enough space to add items of income or expenses in the existing budget.

- Maintain budgets on a continuous basis. Ideally, one should have a monthly budget rolling into an annual budget. The annual budget should also be in line with the long-term budget.

- An important part of budgeting is keeping track of actual income and expenses and calculating variances. If variances are beyond acceptable limits, then it is time to revisit your budget and make necessary changes.

- If you have a long list of income or expenses, it is advantageous to use excel or other computer software. For example, by using excel you can add comments, format your sheet, create reports using certain information from the excel sheet.

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In this era of recession, deflation, and job cuts, it is especially important for you to consider where your hard-earned money is going; financial security is the key in today’s unpredictable world. And the first step towards gaining that security is to have a saving plan.

Do you have money put away for a rainy day? How will you manage if there’s a family emergency? What about a down payment for a home, or a fund for higher education, or retirement? Do you have loans to repay?

In this era of recession, deflation, and job cuts, it is especially important for you to consider where your hard-earned money is going; financial security is the key in today’s unpredictable world. And the first step towards gaining that security is to have a Saving Plan.

Still not convinced? Then ask yourself why you need to save. The answer’s really very simple: so that your money can start earning money, and work towards reducing the effort you put in everyday.

START SAVING NOW: HERE’S HOW!

You might wonder how to begin saving if your income is already over-committed. Efficiency and discipline are the answers.

• You need to first find out where your income is going. Maintain a diary for the month, noting down everything you spend on, to the last paisa. You will be surprised at the amount of random purchases you make – from coffee breaks to grocery bills. These are the best places to start trimming.

• Then, make a budget. This isn’t as difficult as you think. All a budget does is create a plan for spending, by stating expenses and goals. Make sure to cover fixed and regular expenses such as mortgage or rent, utility payments, and car or loan/credit card payments. Then set limits on necessities like groceries and clothing, as well as nice-to-haves like entertainment and travel. It’s also important at this stage to factor in a savings amount.

• Now, your first priority is an emergency fund, if you don’t already have one in place. And the easiest way to do this is to have the amount deducted from your salary every month and put into a Fixed or Recurring Deposit. Give yourself a pat on the back if you find yourself adding that little extra to your fund because you managed to save a little more this month. You might find it easier to stay within budget if you use cash or debit cards for the necessities and frills.

• As your emergency fund accumulates, your next task is to find more money for savings and even investment. Begin by paying off your credit cards. If you spend a little time examining your monthly statements, you will be amazed to see how much money you’re losing just by way of interest!

SAVING Vs. INVESTING

At this point, we need to address the differences between saving and investing.

Savings provide for emergencies and fund specific purchases in the near future (within two years). The primary goal is to store funds and keep them safe. However, you invest to increase net worth and work toward long-term goals. Also realise that investing involves risk, where you could lose some of your original investment. Only consider an investment plan when you have in place an emergency fund, insurance, control over credit use, and a retirement plan.

IN THE LONG RUN

Now, consider making a long-range savings and investment plan. When beginning to plan for investments, consider your goals, the amount of time you will be able to spend on nurturing these investments, how much you know about the funds, how much money you have to invest, whether you can tolerate risk, and handle loss. Remember that your ultimate goal is a financially secure future for you and your family.

If you look back over all that we’ve discussed so far, you will realise that we’ve told you how to begin saving money, in small, manageable chunks. The final objective might be to set aside enough for you to retire so that you don’t have to work another day, but your immediate goal is to start the process and become habituated, so that saving becomes a way of life, and a chance to improve how you live.

If you are still studying and think there is no need for you to plan your budget and believe the responsibility of planning the finances rests solely with your parents, then you need to reconsider! A few mistakes you commit during these critical years might trouble you for the rest of your life.

You should be able to draw out a budget now and follow it even though your payments for college are made by your parents. You can set aside all the luxuries like having an expensive car, clothes, or a stylish mobile or a laptop. This will help you in the long-run.

The right time to formulate a budget plan would be when you are still in college! Step one would be setting up a budget, which is as easy as drawing a timetable for your study. Firstly, you will have to calculate your monthly income; that is the amount you think you will take home once you land a new job. Secondly, you will have to calculate your primary expenses which include compulsory payments and which is not liable to vary. This will include your rent, EMI payment towards a car loan (if at all you are planning), electricity bill and the student loan, if any. For starters, ideal savings would amount to 10% of your earnings.

Next step would be to calculate your other expenses like groceries, dining out, clothes and other miscellaneous expenditure. This tends to vary and these expenses are within your control! You will get better and better at managing them once you develop a habit of comparing your expenses month on month.

You must learn to control your expenses according to your income. The extra money also could go to your savings. If you are unable to match your income and expenses, you should find ways and means to bring about variation in your primary expenses. For example, you could move into a home with a lesser rent etc.

The important thing is to develop a habit of tracking your expenses. That is, after allotting a certain amount under each expense category you will need to regularly keep a watch over this so that you do not end up overspending. It is better to spend some time everyday rather than to sit at the end of the month to find that you do not have any money left! The periodical watch also helps you to adjust your cash flows accordingly. If you find that an unexpected repair has come up for your car, you could use some money, which you have allotted for your clothes towards the repair.

Once you have followed your budget after making a few adjustments, you have to regularly review this budget at the month end and keep making changes accordingly. In this way, you will also be able to move more money, which is surplus each month to your savings!

You never know what’s in store for you! For instance, we cannot control outside events like recession. No matter what you do, it is going to affect all of us in some way or other. However some simple tips like optimum asset allocation, debt reduction, keeping emergency cash will help you tide over the rough times, without much damage.

Check your expenses and adhere to your budget

People tend to forget that good times don’t last forever. If you spend lavishly during good times and continue the trend without adapting to changes in circumstances, very soon you will land in financial trouble. Hence to ensure you lead a consistent lifestyle, always draw out a budget and ensure you stick to it religiously. E.g. if you have allocated Rs 500 per month towards your entertainment expenses, don’t spend a rupee more than Rs. 500. It will not only help you handle your finances better but will develop your willpower by delaying instant gratification.

Don’t rely on future income

Depending on future income in order to spend today, is one of the biggest mistakes we make. This has been evident during a job crisis, where youth racked up a huge credit card debt and took heavy loans. But when the salary cuts and job losses occurred, they were unable to pay off their debt. E.g. if your monthly income is Rs. 20,000 always ensure you spend well within  Rs. 20,000 as pay cut or job loss may land you in trouble.

Reduce your debt

Got a bonus? Then pay off any loans that you have taken. If you have multiple loans, first pay off the loans with the highest interest rate, then the one with second highest rate and so on. E.g. if you have a credit card debt, personal loan and home loan, first clear off the credit card debt, then personal loan and finally home loan. For this you will have to plan out your debts and then go on following it systematically and steadily. It will not only save you money but will also give you mental peace.

Opt for strategic asset allocation

Though experts have consistently stated the importance of asset allocation, many investors tend to overlook this fact and invest only in the hottest asset. But remember market conditions do change and what is hot today may be out in the cold later on for a long time. So ensure you divide your portfolio amongst stocks, bonds, gold and real estate to get the maximum returns from your portfolio. Though your portfolio may under perform for some time, it will end up protecting you when the things get rough.

Keep emergency cash

You never know when a crisis can strike your family. Death, disease or job loss can end up upsetting your investments. You might be forced to sell your investments though they have not been given you any profits. Hence it is advisable to keep at least 3-6 months of your household expenses aside as emergency cash.

Sort out Your Finances

Agreed, keeping tabs on and handling your finances closely, may not sound like an interesting job, but it is a necessity. However you can reduce the boredom by putting a system in place. Once it is done, you can spend a few hours a month on this job. E.g. on Sunday, you can spend 1-2 hours to find out how your investments are performing, reading up any news concerning them or talking with your financial planner about the performance of your investments.

Plan in advance

One of the reasons many people land in financial mess is that they don’t plan their finances ahead. So it is imperative to plan your finances properly. Find out your current position, where you intend to go and set up a feasible plan to achieve your objectives. Unforeseeable events may occur and make you stray away from your plan for a short time, but ensure you get back on track at the earliest. Always remain focused and keep a watch on your progress. E.g. you are saving to buy a home and have started investing for the same. But 6 months after you started investing, you lose your job. If that happens, stop your investment, get a new job and again restart your investment.

Invest systematically and gradually

The biggest problem is that most people don’t bother saving till it is quite late. So they don’t have any money to fall back on in case of emergency. Hence it is essential to start small, but regularly and then increase the amounts later on. E.g. you can start a SIP, in which a particular sum is debited from your bank account and invested in a mutual fund. Or you can open a recurring deposit, which acts like a SIP, initiated by the bank. All this will occur automatically, so you have no excuse not to save.

Be in charge of your investments

The markets have crashed, the realty is down in dumps. What do you do? Sell off? Wrong. Unfortunately, this is what most investors do. In this situation, it is advisable to hold on to your portfolio as selling will just end up causing you financial loss. Instead increase your emergency cash reserves and periodically review your asset allocation of your portfolio.

Set a realistic outlook

The days of stocks giving a return of over 40% are over. While it is possible some of them may give you those types of returns, it is setting yourself up for disappointment if you keep your outlook very high. Instead keep a practical outlook of earning 12-15% returns from your investments.