As the new year has started, you may find yourself looking a little too closely at your bank account and credit card statements or perhaps completed avoiding everything related to money matters. When it comes to money matters, January is the right time to take control of your finances. So, beginning of the year tends to bring a lot of things into focus and let us discuss how to make this year better than the last one.
Fix a savings goal
It is observed that people who set a savings goal, save much faster than that of those who do not. Obviously, you have goals such as arranging margin money for your dream home, saving enough to go for an exotic vacation with your family, etc. Accordingly, name your goal and work out how much you can save each month and get started. Do not just pick any number as your saving goal. Think practically and compute how much is your earnings and expenses on a monthly basis and fix a realistic number which you can save each month. It is a good idea to have both annual savings goal with monthly break-up, considering festival, birthday, wedding anniversary months.
Follow 50/20/30 rule
Spending some of your quality time categorising your spending pattern which could be huge eye opener. For instance, categorise your spending in the housing, car, other loan sections. Personal finance literature suggests the 50/20/30 rule. That is 50% on essential spending such as rent or repayment of housing loan, home and auto insurance, transportation, provisions, utilities, etc., 20% towards your personal financial goals like saving or paying off debt and the remaining 30% is flexible like expenses that could vary from month to month like dining out, shopping, hobbies, entertainment, etc. Thus, 50% goes towards needs, 20% savings and investments and 30% to wants.
Create and keep correct records
If you simply prepare a budget with the above rule, you may not be able to achieve your savings goal. It goes without saying that accurately tracking your spending pattern creates a further sense of accountability. You could simple create an Excel sheet to track your expenses or install and use a relevant money management app in your mobile which is handy. The money-management apps that automate your savings alert you on overspending. By recreating a record, you can track your past successes and failures so that you can learn from your mistakes and identify areas for improvement.
Strength your emergency fund
Emergency fund is a separate account wherein you set aside funds required in case of situations such as job loss, a debilitating illness or a major expense. Generally, it is advisable to keep at least three to six months of living expenses into
the emergency fund. By creating an emergency fund, you ensure that any unforeseen expense will not ruin your financial plan.
Discuss with your life partner
Whether you are getting married, or you are just starting to consider moving in, obviously you need to talk about money with your life partner. You should also talk about credit card debt, financial goals, and money habits to ensure that both of you are on the same page.
To conclude, by adopting the above, you are positioning yourself in the best possible place for achieving financial success, but it takes extreme discipline, dedication and repeated sacrifice.
The writer is a professor of finance & accounting, IIM Tiruchirappalli