Can you imagine working all your life just like you are right now with no sense of Financial Independence? The same 9 to 5 monotonous schedule continuing until you get too old to do what you do now? The same financial journey continuing until you reach 60?
Of course not, each one of us have a forward looking future plan for ourselves – like I have of living somewhere near hills, with a study room that has a fireplace where I could read books, go for a random walk in evening, where I could enjoy nature, where I am with my loved ones. Basically, doing what I love doing most.
But, doing what you love doing still requires money – unless it pays you enough for that “2 waqt ki roti”
Many of us might already be aware of this new term called FIRE – Financially Independent Retire Early.
This blog post would be focusing on the fundamental tasks that one should be doing with their income, how one could effectively manage their finances without compromising on their needs. Please note, I mentioned needs and not desires, there is a definition for need, but no definition for desires. We should have needs and goals.
With that in mind, let’s get started – I have basically prepared a list of sequential steps that we need to think about in order to get our financial life stable.
Step 1 – Calculate your monthly expenses
First and foremost and the most critical step is to compute your average monthly expenses. Its good to have an excel spreadsheet prepared for this.
Largely the most common line item expenses that you should take note of are – Rental, EMIs, Groceries, Commute (Cab or Fuel expenses), Utility bills (Telecom, Internet, Electricity, DTH, cooking gas, etc), Insurance (Health/Life) premiums, Vacation, Donations, Shopping & Dining, House help, Maintenance, Gym memberships, OTT services (Netflix, Amazon Prime, Hotstar, etc), other miscellaneous, etc.
Please be very honest while allocating an average monthly amount to all these expenses.
Just doing this very simple exercise will help you in understanding which expense is eating the most from your pocket.
Step 2 – Classify your expenses into essential vs avoidable
Once you’ve prepared the above list, label each of these expenses as either essential or avoidable – doing this would give you a further edge in understanding your spending behavior.
Again, please be very honest to yourself while doing this.
Just calculate a simple percentage distribution of your expenses across the two labels – and as a thumb rule, if your avoidable expenses are more than 30% of your total expenses – it is not a good sign and you need to think on measure to cut down on such expenses.
To give a few examples about which expense could be accounted as avoidable vs essential:
| Expense Type | Label |
| House loan or Education loan EMIs | Essential |
| Vehicle loan or Mobile Phone EMIs | Avoidable |
| Insurance | Essential |
| Dining | Avoid as much as possible |
| Shopping | Avoid as much as possible |
Step 3 – First Save and then Spend
Now that you have a good idea about your spending patterns, make sure that the actual reality is aligned with the plan on paper.
And the best way to stick to it is by saving first and then spending the rest you’re left with.
What works for me the best is, I have a separate Bank account with no Debit Card or Internet Banking – as soon as my salary gets credited I transfer the planned saved amount into that account and keep the rest in the same account for monthly expenses.
This is especially very helpful for those of us who are impulsive buyers – who can’t resist that urge to buy something. Especially in today’s world of such a convenient experience of shopping online, it is very important to resist that sudden urge of impulsive buying.
Step 4 – Plan for any unforeseen financial emergency
We all saw how the COVID impact created so many job losses, it has completely shaken the world economy and everyone is still figuring out how much more impact is yet to be seen.
No one could have imagined that COVID would not only impact human life by affecting people’s health but also the collateral damage caused by the lockdown has impacted human life by impacting the economy.
We call such events as unforeseen emergencies, and what could have saved you here is having an untouched corpus of money to help you survive the tough times.
A simple thumb rule for calculating the corpus amount is simply to save six to twelve months worth of your expenses that you calculated in Step 1.
An unforeseen emergency is not just job loss it also includes any health emergency around your family members, or any accident repairs etc. If you have this corpus of your monthly expenses saved you’d be in a much better peace of mind.
Earlier our Mothers used to be have such emergency savings for our Dads, and no one had a clue about it in the family – but with changing times this practice is fading away thus you need to be very sure to have this money saved and untouched.
Step 5 – Get your insurances
We talked about saving for unforeseen emergency, but that corpus of money is to save your from some measurable situations, but what about a bigger emergency that is beyond your range to cover. You need to have a much bigger cushion to fall back on whenever the need arises – the need could be either a health emergency or even something very unexpected.
Yes, Insurances help you cover not only yours but all your family’s life and health from all adverse situations.
For those of us who don’t know the different types of insurances and their advantages – here’s a brief overview about them:
- Health Insurance – This insurance protects you from any in-patient medical treatment at hospitals. That emergency could arise out of some planned treatment or some unexpected unplanned event as well.
- Life Insurance – This insurance basically covers your life. It protects your family and your loved ones once you’re not around.
In a next part of this blog post, we would be discussing on where and how to invest your money. Remember, money sitting idle in your bank account is also depreciating.
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