Money management #

Managing your finances is crucial. It doesn’t matter if you’re wealthy or think you don’t have enough money to start. Money management must be done with discipline. This is your source for worldly things and services you need.

You have worked hard to earn this so you must protect and manage this.

Preparing for uncertainty #

We work and then get paid, Some part goes to the government as direct tax. From the rest, we try to fulfill our needs and wants. Life is very uncertain and to handle those uncertainty we need to do savings.

People say they don’t earn enough to save. That’s true if your monthly expenses are more than your earnings. If you are someone who is in this situation, I can only say, try to reduce your monthly expenses and increase your income. Either work extra hours (without burning out) or try different options. Anyway this note is not about what are the different ways to increase your income, this is about how to manage your money.

Before reading, prerequisites are: build a budget. Have an idea of your monthly expenses, how much you want to save. Some savings go towards wealth creation, some towards building a buffer for emergencies and unforeseen events.

Hope we haven’t forgotten COVID, when many people lost jobs. We must prepare ourselves for that.

The Pay Day Habit/Discipline #

When you get your salary, first move your monthly expenses amount to a different bank account. And stick to you budget and spend only from this account. The amount left in your bank account is now for wealth creation and savings. If it’s possible try to invest first few days after getting the salary, so that you don’t feel tempted to spend thinking you have lots of money in account.

For this, use 2-3 bank accounts, I use one account to get the salary and move a chunk for monthly expenses, and move another section to a different account just for emergency funds, It’s easily accessible to me when i need it But I won’t be looking at that account daily, so when I check balance of my expenses account before buying things I can get a realistic idea that if i can afford it or not.

My idea is if you have less control over yourself, what you can do is to build restrictions and limitations so that you can control yourself. If you have great amount of discipline, then it’s all well and good.

Investment #

Before we dive into the topic of wealth creation, I would like to talk about saving the wealth you are trying to build. Medical inflation in india is roughly about 15%. A saying is majority of indian middle class family is one medical bill away from going below poverty line. A two-day hospital stay costs ₹1.5-4 lakhs. Major medical emergencies can cost ₹10-25 lakhs - which might take 3-7 years to save.

Protecting the Wealth #

Health Insurance #

Buy a health insurance from a trusted company, do check their settlement ratio and the feedback from online reviews and people around you. You must also read the policy documents properly, what diseases are covered in which situation and condition. This would protect you from the uncertain medical emergencies.

My advice is to take two different health insurance, One for your parents and a different one for you, your spouse and kids. For parents depending on you budget and their health condition 20L to 40L would be okay, and a separate 15 to 25L for yourself and family would be good. Take care of your health in general.

Life Insurance (Term Plan) #

This is for when the breadwinner dies, This would work as a safety net for your family, in the event when you are not around to take care of them, and you had a few loans and now the family is not in a situation to pay that. This amount can be used to clear out the loans and also to future-proof your family.

Insurance companies offer plans for 22-25 times your current annual salary. This is how they calculate your life’s worth. This amount will be sufficient for your family.

The catch is this: even if you take a high coverage plan and pay all premiums, companies can still deny claims based on technicalities.

But if your coverage is too low, it won’t be enough for your family. So you need to find the right balance. Ask people around you about their experience or consult a professional.

Most importantly, read the policy documents carefully. You don’t want your family struggling with claim rejections when you’re not around to help them.

Share all insurance details with your family and close friends who can guide them through the claim process.

Building a buffer #

If you have done the above things that’s great, if not, at least take health insurance for now and when your budget permits you can buy a term plan for your self.

This money is required and would be used when you lose your job or when you don’t have a job. From your monthly salary you should build some liquid cash that can be used in the difficult times.

Whatever is your monthly expenses, you must try to save at-least 6 month of that expenses in a liquid fund. Start slow, build runway for 3 months then slowly increase to 6 month then 12 months.

This gives you room to think before taking a job, this liquid cash can also be used to give to your trusted people in their time of need. But first take care of your self and have a breathing room to decide what you want.

You can use FDs to park your money, they give you very less interest but the idea here is to reduce the risk of what you have. So good old-fashioned FDS are a good way to park money.

Generating the Wealth #

Now if you have a health insurance, may be a term insurance and some liquid cash. We can use your money to build wealth. Building wealth depends on your risk appetite. you can put your money into stock market where the risk is high, F&O where risk is very, very high or mutual funds, where risk is still high, but you are handing over your money to some Fund managers which are expert in this so losing all your money is slightly less likely, in exchange for their service you give them a certain percentage share.

If you have time to invest and risk appetite you can go for stock markets and F&O. If you can invest time and research, you’ll make money from this. But if you’re a working professional without 2-3 hours daily for research, go with mutual funds.

You can research about mutual funds, their type and depending on your goal you can invest. Historically it’s very rare that Mutual funds have given a negative return on long term, but yes its possible that the return you got might be less than what you had expected.

As mutual funds & stock market all depends on many factors which are not in your control, risk is always involved, but Mutual funds are slightly better.

Pick handful of Mutual funds, keep you portfolio diverse, and don’t miss your SIP, and you’ll be sorted for the most part.

Personal Points #

Personally I am doing all of those things that I have written, I have a health insurance, a term plan, and a liquid cash of 6 months that I am trying to increase to 12 months, and I try not to miss my SIPS.

Have your bank accounts and FDs in a nationalised bank, not in co-operative bank or local banks, I have two examples where people where not able to take out their own money because the bank went bankrupt, Although Yes Bank has faced similar thing but nationalised bank risk is slightly lower.

Building a pile of liquid fund and Investment can be done together, initially when you don’t have any or less funds, you can put majority of your savings in building the fund and rest you can put in investment, when you reach your desired mark, you can increase the investment part by reducing the funds part, and so on, when you have fully reached your goal, all the saved amount can be used to put towards investment.

You might think that you can take out the money from your SIPs and use it when its emergency, but as market is volatile and if covid like situation happened then you may see a dip in the market, and that is not the time to take out the money. As you would lose your money if things are in negative. So it’s always a good idea to have a liquid fund.

In addition to above I also follow the 50-30-20 rule , which is 50% of your income goes towards your needs like, house rent, groceries, bills, insurance, EMIs etc. 30% goes for your wants like travel, dining, hobbies, entertainment etc. 20% must be your investment, emergency fund, savings.

Depending on you age, income and expenses you can tweak the percentage. but save at-least 20% of your monthly salary.

Also, every year step up your total SIP value by 10%. If you get bonus money, save part of it too.

You can find lots of content on 50-30-20 rule and Step-up-SIP on the internet, There are various youtubers who have made videos on this topic. You can watch a few to learn more.

Conclusion #

Finance is everyone’s personal choice, how they manage their money is on them. these points just serve as an skeleton, or if you don’t know where to start you can follow the above point after carefully thinking about this. When you get more knowledge about money management, you can tweak at your own will.

Happy financing…..!!!!