While many people
spend most of their time and energy on earning more, it is important to note
that without learning the art of spending money well along with judicious saving and
prudent investing,
they may not be able to create a promising future for themselves and their
families.
Money plays an
important role in our lives. On one side it is a tool for wealth creation for future needs and on the other it serves as a
transaction instrument for satisfying present needs.
While financial planning allows individuals
to meet life goals by prudent management of money and finances, it may be
observed that learning to manage money wisely could be the first step towards
the bigger goal. Both these areas call for ascertaining the need, efficiency
and time frame before getting started.
Expense management is
all about getting the right
value for every rupee spentand
appropriate decisions on the payment mode, that is, cash, cheque, credit card
or equated monthly instalments (EMIs). The two can help us meet our spending
needs with ease and comfort.
A
BUDGET FOR ALL TIMES
Making
a family budget which includes regular spends and one-time, even discretionary,
expenses, is a way to be never out of money and save enough for life's goals.
Making a family budget which includes both regular and
one-time, even discretionary, expenses, is a way to be never out of money.
A person with a budget will have control over his finances. He will be in a good
position to manage cash flow and pay short-term dues and make provisions for
other goals. The budget of one person may vary drastically from another person
with a similar cash flow. This is because budget reflects our habits and
aspirations.
It is
best to customise spending categories based on past experience and have
well-defined financial goals, short-term as well as long-term. Seeking advice
from a Certified Financial Planner or a CFP practitioner is the best way
forward.
DIVISION OF EXPENSES
Irregular and Discretionary Expenses:
These
include things like buying furniture and consumer durables, valuables like gold
or going on a holiday. Since these cost a lot, one must plan intelligently. For
example, while buying furniture, do a price-value analysis to determine the
quality and place from where to buy. These days various payment options are
available-cash discount, zero-interest EMIs, etc.
Expense management is all about getting the right value
for every rupee spent and appropriate decisions on the payment mode.
If the seller offers zero-interest EMIs, compute the
cost effectiveness by looking at hidden costs like the processing fee. The
right way to make such purchases is money from planned budget which may be from
the investment corpus.
Credit card may be used only as a mode of payment
rather than a source of finance. Impulse buying for expensive items out of
budget on account of "sale", "discount", etc, should be a
strict NO.
While making payment through credit card, make sure
you can pay by the due date to avoid paying high interest. Interest rates on
credit cards are much higher than on other forms of credit.
As a result, credit card debt may deplete your cash
resources fast. Credit cards need to be judiciously used; there should be
enough money to back credit-card expenses. Else, debit card should be used.
GET THE BEST DEAL
Negotiation plays a key role in saving money and
getting the best deal. We should not hesitate to ask for complimentary products
or services.
For instance, we can negotiate room tariff in case of
hotel booking or ask for complimentary breakfast, lunch and dinner and airport
pick-up and drop. Consumers also have the right to demand discount on the
maximum retail price printed on products.
With the rise of online shopping, we can get good
deals on the web. The internet allows us to compare prices of various products
and services and choose the best option.
Sometimes this helps us get discounts and gifts as
well. For example, for books, we can visit websites like www.flipkart.com and www.amazon.com that
offer these services and get the best deal.
We can also rent flats and buy/sell other assets through
the internet and save brokerage, which can be pretty high. This will reduce
expenses to a large extent.
COST BENEFIT
For example, lower running expenses of diesel cars
cannot be justified when we calculate the high price of diesel cars, unless it
is justifiable by large distances to be travelled.
Moreover, diesel cars require more maintenance and
have a shorter life. Also, their resale value is less than that of petrol
vehicles.
In addition, while we may be inclined to be part of
"Green Revolution", a similar call needs to be taken while buying
energy-efficient products based on need and usage, as sometimes the cost may
not be justified, for example in case of hybrid vehicles.
LITTLE BIG LUXURIES
There is a difference from the accounting perspective
between an individual and a company. While the company's decisions are focused
on increasing shareholder value, the individual's planning focuses on achieving
his/her life goals.
The company can justify capital expenditure such as
plant and machinery by way of capacity expansion, depreciation benefits and
corporate taxation.
However, seen in this context, buying a high-end
luxury car (on impulse, on EMI!) cannot be justified without adequate analysis.
Similarly, intangible assets may be valued and accounted for and depreciation
claimed on them, but these may not have any relevance for the individual. Some
exceptions to this could be expenses towards education in various
courses and buying books and journals, etc, which
have long-term benefits. Education loans may also be procured, if possible.
Furthermore, certain purchases like buying a vintage
car, a painting or an antique piece may fall under the purview of wealth
management and alternative investments. However, buying a "Mona Lisa"
on EMI or on a credit card, even if possible, is definitely not justified in
any manner.
It is important that income is judiciously allocated
between present and future spends. For the future, we should save and invest
wisely as per our risk appetite. For the current expenses, one should be
well-budgeted to be able to meet all expenses.
Thus, to conclude we may say that no more than one
third of one's net income should be used to service debt and savings should be
at least one-third the net income. Accordingly, the expenses should not exceed
the one-third net income in principle.
THE CREDIT CARD ADVANTAGE
·
Helps budget expenses
(provided we pay our bill on time)
GOLDEN RULES OF MONEY
MANAGEMENT
o
Put a broad limit to
regular expenses so that they do not go out of control.
