Financial planning has to be started as soon as you get a job. However, most young employees do not know how to manage their income. When I started my career as a government employee 60 years ago my basic salary was Rs 80. With various allowances my take-home salary was Rs 150. Those days almost everything was cheap and I managed to save a part of my salary every month. From my father I had learnt how to set up a household budget and what to do with my savings. Over the years, I also learnt how to use credit cards and plan for my retirement. The lesson I learnt the hard way was not to let my money dictate what I can do and cannot do.
As long as you are living with your parents you will not feel the need to save money. However, when you start living away from your parents you need to set up a monthly budget. A good budget will help you to save money and to stay on track in reaching your goals. You have to remember that you cannot get into the savings habit without a proper plan. Economists call it the science of self-monitoring.
Our income levels are different. Therefore, you have to determine your monthly income which includes your salary, rent i from property and the money you get from outside jobs depending on your skills. Today, most of us cannot manage with our salaries. Therefore, teachers start giving tuition and doctors do private practice. There are many part-time jobs you can do according to your special skills and the time you can devote to them.
Maintain a record
From the start figure out how much you spend. Write down everything and keep all bills and receipts in a file. Do not get into the habit of throwing away receipts because you may need them later as proof of payment. Once I received a red notice from the Water Services Board for non-payment of bills. I did not get excited as I had the receipts. When I produced them, they realised that they had made a mistake. Even when you buy something using your credit card, do not throw away the receipt. When you meticulously track every single payment you will have nothing to worry about later.
I have a friend who has studied economics and financial management. He showed me how he lists spending money under three categories: Fixed expenses, committed expenses, and discretionary expenses.
He told me that fixed expenses included housing, insurance, taxes, car payments, and general things that do not change from month to month. His committed expenses included utilities such as mobile phone charges, food, transportation, credit card payments, tuition fees and monthly allowances for his aged parents.
The bulk of your income will have to be used for fixed and committed expenses. You simply cannot ignore them. However, there are many discretionary expenses which you should handle with care. For instance, you have to decide whether you can buy new clothes every month. Sometimes, you can easily manage your expenses as far as entertainment is concerned. Some of us are in the habit of buying books, newspapers and magazines regularly. Then your children will need money for extra-curricular activities. In addition, you may have to spend money on medical care.
Man is a gregarious animal. He cannot live alone. He has to entertain friends, attend weddings and birthday parties. Only you can decide how much you can spend on such events according to your income. When you commit everything to writing you will get a clear picture of the financial situation. If you spend money haphazardly, you will court disaster.
One major lesson I have learnt is that you should spend less than you earn. Otherwise you will be indebted to others. If you are just starting your career, recognise the basic principle of financial discipline. If there is more money going out than coming in, you are in trouble. This is the time to prune down your discretionary expenses. Perhaps, you may have to cut down the number of days to entertain friends at home or elsewhere.
Fixed expenses
Even committed expenses can be curtailed. You can walk from the railway station to your office instead of getting into taxi. Think twice before you invest money in an expensive mobile phone. Even at home repair the leaking taps and be water efficient. Switch off lights which are really not necessary. Such steps will help lower your utility bills. Sometimes your fixed expenses may be more than you earn. Think of making big changes. Otherwise you will not be able to save money. I have seen prudent people getting rid of their vehicles and moving into smaller houses, just to save money. If you cannot afford to maintain a big house and an expensive car, there is no point in clinging to them.
In the past, we were advised to save one fourth of the income. But this may not be feasible for everybody. Everything depends on whether you are single, married or having children. Another factor is that whether you are living with your parents and grandparents. A general rule of thumb is that you can save at least 10 to 15 per cent of your income. If you can save more, it is fine. But this seems to be the minimum you should be saving.
If you have just started life as an employed person, try the 50 – 30 – 20 plan suggested by Harvard Professor Elizabeth Warren. She says your fixed and committed expenses should make up half of your after-tax income; 30 per cent is discretionary spending and the final 20 per cent goes to savings.
Emergencies
Savings and investments are essential not just for emergencies, but also in terms of looking ahead to big expenses such as buying a house or car, paying for children’s higher education, as well as planning for retirement. As you will not remain young forever, you have to think of such eventualities.
Today, most of the employees’ salaries go to the bank. About 50 years ago we used to get the salary at the end of the month. When you have money in your hand, you tend to spend it lavishly. Therefore, keeping money in a bank account is a good practice introduced by the Government. When you have a bank account, your employer will automatically transfer your salary into it every month. This is a highly disciplined way of saving money.
Try to maintain an emergency fund to cushion the blow of losing your job due to ill health or some other reason. The recent economic downturn after the Covid -19 pandemic only reinforces the importance of having this safety net. Always maintain the emergency fund in a savings account because you will get some interest. When you are financially stable, you can have a fixed deposit account and enjoy higher interest rates.
Managing your money is not rocket science. Any sensible person can do it provided he decides on a plan and remains committed to it.