Making a simple budget to improve your personal finances

 

Making a simple budget to improve your finances. This is an important step in reaching your financial goals and financial independence

I am sure there will be many among us who have never actually attempted to make a budget or even noted down their expenses on a daily basis. Many of us would have never experienced the need to see all their income and expenses in one single sheet – which is more due to negligence than lack of knowledge.

How to make a household budget

 

 

Why budgeting is important?
All large companies and organizations do their budgeting, write their expenses, do regular audits in order to see if their actual spend is as per the budget or not. They hire specialists to do this job as they want to prevent any money leak and also they want to be on top of their expenses so that they don’t lose money in a big way.

 

How about budgeting at my personal level?
At personal level, we do not need the kind of skill level that corporations employ to do budgeting, but a basic work on spreadsheet which is not too much time consuming is enough. This is just to have a quick access to your financial status at any given day and to plan any expense which is not a regular one like purchase of a new car, or a foreign holiday.

 

I don’t have knowledge of accounting software / tools required to do budgeting
No worries. For keeping track of personal expenses and basic month on month budgeting, you need to be an expert in using accounting software or tools. As this is Information Technology era and all of us are well versed with MS office (MS excel to be more precise), which is more than enough to do the designated task of budgeting.

 

What do I need to do with MS excel?
First make a list of all your spend in a month. For starters, make four columns in the excel sheet.

  • First one should have the date of expense
  • Second should have the place where you spent the money
  • Third should have the amount you spent
  • Fourth one should be the category of expense (classification as food, grocery, housing etc)

 

how to make budget in excel

 

Every single expense, I repeat every single expense you incur should go in this excel sheet. Why? You need data. This data will make foundation of your budget. And the data accumulated over few months will give you enough food to analyze your spending pattern and believe me; it will help you save tons of money.

At the end of the month, sum up all. You will be amazed to see how much you spend, when there is no budget for expenses.

Now – sort these expenses by category. Sum up the money you spent in each category. This category wise spend will be the backbone of your budget for the next month.

Easy so far? Isn’t it?

Now make a new spreadsheet which will be the budget for your next month. Keep four columns in this sheet.

  • First is category name (housing, food & groceries, fuel etc)
  • Second is what I spent on category last month
  • Third is what I intend to spend in this month on the category
  • Fourth is how much I actually spent on the category (this will be filled once the month gets over)

budget summary - household

 

So many things to do? This looks little tough for me. Do I need to carry this exercise every month?
This might look little tough as you are not used to of doing this. Only the first cycle would take time, then it’s a kind of a cake walk. Once you have completed one cycle, format is ready. You only need to enter the data from month 2 onward.

Ok got it. Now how is it going to help me save money?
If you are making your budget for the first time, there are good chances that your spending is more than your income otherwise you would not be taking pains to make the budget. Once you have data for a few months – say three months you can see and analyze the expenses you have incurred in each category. If you are spending way too much on eating out or buying cloths, it would be clearly visible in the category expenses figures. You can dig a little deeper to check and see if you can trim these high spend category expenses which are not required for survival or which are mostly want related expenses.

Armed with the data of few months, you can repeat the exercise of trimming the unwanted expenses. The money which gets generated from cutting down unwanted expenses will improve your cash flow and will give you an opportunity to invest this money in order to generate higher net worth. This higher net worth in turn will lead you to financial independence at a quicker pace. Wealth creation is all about the art of increasing the gap between your income and expenses and keep investing the difference across the investment spectrum to generate higher and stable returns.

Budget is one of the major steps in road to financial independence. If you master the art then you can be assured of sealing the money leaks in your month on month expenses.

Supermarkets are a big TRAP

Why Supermarkets are a big TRAP and also big money DRAIN !!!

All the supermarkets are intelligently designed. What item will come where and in which row is meticulously planned. No wonder why the retail chains hire MBA grads for such a higher salary. The planners sit in a plush meeting rooms, peeping at the historical data and planning how to fit certain useless high margin items in front row of the stores.

Supermarket are money drain

 

The layout Trap

The layout of supermarkets are organized in such a way that daily use items are always found at the farthest place from the entrance. Once you enter to buy your supply of bread or milk, you need to wade through the entire store with each shelf literally shouting the offers to you – on useless items. And being a ‘good buyer’ we always end up picking a couple of useless products because of some stupid offers on them.

It is easy to avoid the TRAP

It is not that there is no way to avoid this trap. Impulse buying can be tackled tactfully by visiting these super markets with a written buying list of items you intend to buy. And you must stick to this ‘buying list’. The buying list is something that requires a little bit of effort from your end to make. This is in order to keep your list as efficient as possible.

Do keep the following points in mind for preparing an efficient buying list.

  • Plan main grocery shopping trip only once or twice in a month. This applies to the items like flour, pulses, rice, cooking oil, spices, supplies like sugar, tea powder, coffee powder, cheese, sauces etc. Estimate the quantity you would require of these supplies and enter them in your beginning of the month main shopping list. At the most when you enter the super market, you can strictly look at the offers on the items in this list and weigh them by arriving at per unit cost of item – with discount and without discount. Take whichever is the cheapest BUT the price point – with discount should justify the quantity you are buying. Use common sense; do not buy 25 Kilograms of sugar just because you get 10% discount on buying 25 kilograms pack when your monthly requirement is only 2 kilograms of sugar.
  • Reserve a weekly visit just to buy the stuff which is perishable and you need their supply often. This is for the products like eggs, milk, paneer, curd, juices, yogurt etc. You cannot stock these items for long at home and they are always better if consumed fresh as they come with a short shelf life. You can include your weekly bread supply too in this list. Go to the supermarket on a weekend, check offers on these products and purchase them. Here again use common sense when you are comparing discounted price with the quantity.
  • Add items from your main shopping list into the weekly list for which you are low on supply. For example, if you have some unexpected visitors at home for a few days, you are sure to go low on the supply of cooking oil, wheat flour, rice, sugar etc. Do not go separately to buy these items on a weekday. This is waste of time, fuel and energy. Instead, add the low stock items in the weekly shopping list and buy them on a weekend. Since weekends always have some discounts running to attract buyers, a chance of you getting a better price is always there.
  • Take review of the stock levels once in 15 days and again add items which are low in quantity in the weekly shopping list. Here again it should not be the case that you have monthly rice consumption of 5 kilograms and in spite of having 10 kilograms in stock you have gone ahead – added the item in the monthly shopping list and bought another 10 kilograms just because there was an offer running on the item.
  • NEVER ever enter any super market for shopping with empty stomach. When you are empty stomach, your hungry stomach guides you through the fast food stuff and compels you to buy stuff like cakes, pastries, ice creams, snack items. Your hunger makes you succumb to buy sandwiches and pizzas thus killing the purpose of entering the super market to buy grocery items and save money by buying your monthly requirements in one visit.

Super stores play mind games with people. Armed with the data and analytics, coupled with brainstorming of grade A pass outs from business schools, they literally direct you on what item to place in your shopping basket. You need to be a little smart and systematic to dodge the useless offers thrown at you when you enter a super market and only buy the items you need to buy.

A visit to the supermarket for grocery shopping could turn a big money drain and destabilize your budget for the month if not planned carefully. Over a period of time, these visits have potential to derail your financial planning and can make a big dent in your wealth creation plans.

When you should start investing in stocks?

When is the right time to start investing in stocks?

Most of the people who start looking to bring their financials in order have a question in their mind. “When should I start investing in high return instruments?”

They are fascinated by high 20%-30% annualized returns from equities. They have some extra cash which they want to invest for some time and even before anything happens, they convince themselves into investing the spare cash in high risk equity markets in order to rush towards achieving financial independence.

 

stockmarket

 

This reminds me of one of my friend, who reaped exceptionally well returns during the dot com boom and used to tell me how easy it was to tame equity market and double your money in no time.

Unfortunately he had invested all his eggs in one basket that is into the stock market and lost big time during the 2008-2009 market crash. This friend of mine had borrowed a lot of money to buy stocks in hope of making big and that too very quickly. But things didn’t work out as he expected.

There are two basic investment criteria of investing in stock which every investor should consider before taking plunge in stock market investing

  1. You do not have high interest loans looming at you:
    This implies that you should not have high interest loans like personal loan, consumer loans, credit card balances and rotation of balance on credit cards etc. The basic home loan is perfectly fine as home loans create assets and the home you bought is giving you shelter. Stock market investments are high risk investments. If you have high interest loans and still you go ahead with investment, you might land in trouble. There is no fixed investment life-cycle in stock markets. Sometimes you may have to remain invested if market conditions are not good. This might affect your loan repayment ability if you are planning to pay off the loan monthly payments from the returns on your investments in stock market.
  1. You have sufficient emergency fund to bank on during emergency situation:
    Emergencies never give you written intimation before they come. Emergencies bring mental trauma as well as financial hardships too. What if you lose your job due to some meltdown and you do not have money to pay for utilities and your home loan? To counter this type of situation, you must have sufficient liquid emergency fund to pay for rents, monthly home payments (EMI), utility bills etc. Ideally you should have an emergency fund to fund your 6 months of unemployment which should take care of all your bare minimum expenses in case of emergency. This fund should be somewhere stacked in liquid fund which can be accessed quickly. Never put your emergency fund in debt funds, equity linked mutual funds, insurance or stock market. Idea is you should not depend on market conditions to take back your money.

Also, one more important aspect you should consider. Being educated, you should know what you are doing. Take charge of your investments as it is not a rocket science to do a bit of arithmetic before taking the plunge. You need not to be an expert but a basic idea on how mutual funds work should be alright to start investing into mutual funds. Central idea is to avoid the risks posed by high risk investments as a naïve investor.

Investing is fun, it can be highly rewarding but to enjoy it you must set your house in order first, explained above in two simple points. This will cover yourself from the risks posed by the high risk investments in equities and you can do proper asset allocation to counter the risks.

 

 

Why you need Insurance ?

Make sure you are adequately insured:

Definition of insurance: A promise of compensation for specific potential future losses in exchange for a periodic payment.

The definition clearly says it all. However, the companies which offer insurance provide a bouquet of products. Whole life insurance, term insurance, endowment plan, ULIPs, health insurance is some of the product categories. However, each classification may have one or many products with slight variation

Why you need insurance

 

Why you need insurance?
You never know what is going to happen in near/distant future. If someone is the only earning member of a family and due to health reasons, he is unable to work, or due to sudden demise of the sole earning member, family goes in no earning mode.

  •  Who will pay the EMIs of home loan, vehicle loan?
  •  How the monthly household expenses would be taken care of?
  •  How to pay kid’s school fee & tuition expenses?
  •  How to pay expensive nursing care? Hospital expenses are skyrocketing these days.

    Leave apart human life, what if your vehicle needs emergency repair? If the repair cost runs into few thousand of rupees and you do not have contingency funds at hand for this repair, it will be pain for you to arrange the sum and repair your vehicle right?

Answer to above questions in case of unexpected happening is INSURANCE. Insurance make sure that there are no financial hardships to family if something goes wrong.

Do your own research – A little bit of homework is a must

Do not assume that you need to buy insurance policy because your friend who is a salesman in insurance firm told you to do so. First identify purpose of buying insurance. Insurances can be of few types

  • Life insurance: The only purpose of life insurance is to provide safety net to the people if the person taking insurance dies a premature death. This is for the ones who have people financially dependent on them. This gives them means to offset financial losses in case of their demise. The best or rather ideal route here is to take term insurance policy. This is the least expensive solution and serves its purpose well. There are many online calculators available for calculating premium by various service providers online.Other life insurances like whole life policies / ULIPs are also available but they are usually not worth due to the cost associated with them. The investment returns from these products are poor compared to investments in other options.There is no benchmark formula, but general thumb rule is that take insurance cover equal to your liabilities plus 10 times of your annual income. So if you have a home loan + vehicle loan of INR20 lakhs, your insurance cover should be of INR20 lakhs plus 10X your annual income. 10 times of income will give your family a sustained monthly income to cover the expenses for family members
  • Health insurance: If you go back a little in history and compare historical cost of medical treatment, it doesn’t take rocket science to arrive at conclusion that the cost of medical treatment has gone up considerably. And keeping the trend, it will keep moving upward. You must insure yourself to cover the cost of medical treatment. There are host of factors on which the health insurance premium depends. But it is worth comparing offerings from different service providers and to take the best plan based on your requirements. Health insurance will safeguard you from cost of medical treatment and will save tons of cash for you. Also, a healthy family of four, husband, wife and two kids should have a INR8 lakh family floater health plan to cover emergency medical expenses.
  • Vehicle insurance: Vehicle repairs are expensive. Imagine a situation where your vehicle meets with an accident. The vehicle becomes immobile and you need to fine a tow truck. Then the cost of repairs which can break your back. As per the government rules, it is mandatory to take insurance and people usually opt for a third party cover in order to cover any litigation cost arising post accident. But you must opt for a comprehensive plan as there are a lot of costs associated with repairs once your vehicle is involved with an accident. Again loads of online calculators available and based on your needs, opt for the best plan that suits you.

There are other insurances also like home owners insurance, renters insurance, asset insurance, travel insurance but the most important and must have ones have been covered earlier.

If you are not insured and some mishap occurs, your financial plans will go haywire. Also taking proper and adequate insurance is one of the building blocks of financial freedom and wealth creation. Not taking insurance or not taking adequate insurance can make a serious dent in your investment portfolio.

Bottom-line is that one has to make sure that he/she is adequately covered through insurance, both for life as well as health.

Your Car is not your ASSET !

Your Car is not your ASSET !

Yes, you read it right. Your car is not your asset. Or as a matter of fact, none of your vehicle is your asset unless you are into transport business. If you ask any literate human being about “what is an asset?” you will get a spontaneous reply as “It is something that has value and the value appreciates over a period of time / or it generates some regular income”.

 

Car is not asset

 

But if you ask same person to list down his assets, he will most likely to write car as one of the line item. Cars are no ASSET. A fact which is hard to digest?

Car does not appreciate
• Car does not give you income, unless you are a taxi operator
• Car does not keep your principal safe (what you chipped in to purchase it)

When you are writing line items in your asset lists, cars are definitely no-no. They are money drain and are more status symbol in today’s world.

They depreciate quickly, they drain your money quickly –

  • You need to pay insurance,
  • You need to pay fuel costs,
  • You need to pay maintenance costs,
  • You need to pay registration and
  • You need to pay emission related expenses to keep them road worthy
  • You need to pay for wear & tear costs

Imagine, one fine day when you do not have a monthly income coming in, you are retired from your day job. Even though you have a big car parked in porch, it will not give you good or money to buy food. My point is this – a car cannot generate a regular income for you hence it is not an asset. An asset is something which generates monthly income for you like your real estate property given on rent, a fixed cash deposit with your bank, a commercial shop you owe generating monthly rentals for you, gold coins appreciating over the years.

Here I am not saying that Car is bad. I am aware of the convenience it brings when you are moving from point A to point B. My statement is just to make it clear to you so that you do not consider your car as an asset. I want to de-link you from the thinking that you are really doing well in your life by driving a big nice car which is taken on monthly payment. It is absolutely absurd to think that you look wealthy by owing a big car.

Bigger the car – bigger the money drain it is.

  •  You incur more expense on monthly payment,
  •  You incur more expense on insurance payment,
  •  You incur more expense on periodic maintenance, and
  •  You lose more money when you dispose it off

Cars are means to carry you from one place to other. They should not become status symbol in your life. Buy what you need, a decent piece not a luxury metal object.

Bottom-line is that if you keep buying expensive cars on payment and think your car as your asset, you are moving away from financial independence. An expensive car is never a good investment decision and is a hindrance in early retirement plan.

 

CHOICE is yours as MONEY is yours !!!

 

Lifestyle inflation – Why it is bad for you?

What is lifestyle inflation?

When you are fresh out of college, you get a job which is usually an entry level job. You start earning with this entry level job and you move out to a place of your own – either in the same city or some other place. Once you are on your own, you start spending money on all essentials. You have to pay for stay, groceries, internet, utilities, internet etc. You somehow manage all these expenses with your limited income. Gradually time passes and you get regular salary hikes. With these hikes over the years you increase spending. You now make frequent trips to restaurants, you move to a bigger home in a nice neighborhood. You now have a big car for commute instead of using public transport, you have pets, and you now wear branded cloths with the really nice Swiss watch to match your stature.  

lifestyle inflation

Lifestyle inflation comes in picture when someone raises his lifestyle – standard of living in relation to the increase in earnings. If you see it, lifestyle inflation is not a bad thing. After all we all work hard to improve our standard life & comforts. When we get promoted, we need new cloths to match our profile; we need nice vehicles that match our status to commute.

Lifestyle inflation creeps up slowly, we will not know unless we start having serious problems with money we earn. Our food expenses will skyrocket, fuel expenses, expenses to maintain home and vehicles will increase gradually and they will reach to an extent where the total outgo starts pinching us. Lifestyle inflation is a big hindrance to financial independence and wealth creation as once you succumb to it; you have very little cash flow dedicated to investments for future in order to have a sufficient investment corpus to fund retirement.

How to tackle Lifestyle Inflation?

One can easily tackle the lifestyle inflation. There are some ways which can keep you on track and combat lifestyle inflation

1. Budget the expenses and note down every single expense you incur. By doing this you can flag any expense which is steadily increasing. Once you single out any particular expense skyrocketing, you can easily curb it

2. Keep your financial goals in mind. Have the goals written and the plan to achieve them also in writing. This will help you in sticking to your plans. If you stick to your plans, lifestyle inflation cannot cripple you.

If one follows the above two simple steps, it’s easy to limit lifestyle inflation. The entire premise is to stay within your limits, never make expenses column more than income column in your life. Plan wisely and stick to your plan.

To Sum it up: Though there is peer pressure to incur expenses, but increased expenses with increased income to a certain extent justifies your lifestyle inflation. But if it increases more than your income then it will cause a serious dent in your future life. Take charge, have control on your spending and keep investing regularly is the mantra to beat lifestyle inflation. Once you master this art, you are set to taste financial freedom much before others.

Needs Versus Wants

Today I am posting about a very important topic. It is must for us to draw a line between needs & wants. Today’s post is guest post – Courtesy my dear friend Sundeep

We have heard and some of you might have read a lot on wants and needs. And still most of us keep struggling with how to distinguish between them. Before we go there let’s understand these two words:

Need :- Without meeting these, your survival can be in a jeopardy
Want :- Some desires lurking in once survival is taken care of

 

Needs Vs Wants

 

Definitions look simple and understood by everyone. However when people have to apply it in their life many people classify things in wrong category and mostly this mistake is one way. Most of the people tend to count wants in the need category. There is hardly any vice versa case. Why should it be this way?

The answer lies in human nature. Gimme more! is slogan of human life. Being a social animal(don’t get offended I am just reminding we are animals at all), we have learnt to follow social rules, behavior, etiquette’s. In the journey we eventually started following each other’s desires, ambitions, materialistic goals. No animal kills\eat once it is full stomach i.e. once survival is taken care of. Man is the only animal who has so many problems to take care of once survival is taken care of. Life style, social status, peer pressure, relationships, bank balance, real estate,….

Note: Wants and needs are not necessarily limited to monetary things. There are other needs like emotional, psychological, spiritual etc. however those are out of scope of this discussion.

Let’s understand wants and needs in detail

Q: What are the basic needs of life?
Ans: Food\water, clothes and shelter.

Let’s say we have 3 families. Family A which earns 5,000 Rs\month. Family B earns about 50,000 Rs\month and C where it is 5,00,000 Rs\month. Do you think basic needs of life changes for any of these families?

No they don’t. There can be 10 other things listed as auxiliary needs depending on which earning class a person belongs to. However the basic needs don’t change.

What changes is the affordability factor which opens up choices for meeting their needs. Family A buys grains from government rationing store. Family B buys it from wholesale grain store and maybe C buys it from malls or super market. But all they are ensuring is to have wheat flour, rice, sugar etc. available at home. Although the expenses will be different they are still going towards needs.

Now suppose family A thinks that they should have some sweet dish occasionally for dinner. Howsoever small wish it appears, it still falls under wants. The same sweet dish at the the end of meal could be frequent for family B & daily for family C. But for them it doesn’t fall under wants, because they can afford it without altering or disturbing financial priorities. Similarly, there can be some wishes and demands for family B and C which will fall under wants.

This small example can help you apply the need vs. want test on bigger things. For this, you have to be truly conscious about your actions, to be able to judge the difference. Sometimes the line seems so subtle and mind plays games on you in judging a want as a need.

Note that, occasionally going for a wanted thing is no crime and actually sometimes it is required to boost and energize family, show your love and appreciation. One must only be conscious about the decision.

 

Here are few more examples of wants as a thinking exercise for you. Note that the list will change significantly based family income group. Here I am considering middle and well to do class.

  1. You are hungry and decide to go for pizza house instead of healthy rice-plate
  2. You keep changing your mobile, motorbike frequently
  3. You only shop from branded stores and often shop extra clothes
  4. You just had a full stomach dinner, still walking past an ice-cream parlor you give into your temptation
  5. You own two flats and can be easily convinced that you need to buy another one since you have sufficient balance and/or recently got increment in office
  6. You like to change your house interior once in 5 years
  7. Sizes of your fridge, car, wardrobes, TV sets, ornaments(and even body) grow bigger and bigger
  8. You have a masters degree and it feels gratifying to go for a distant learning MBA, although it is not at all relevant to your job profile
  9. Your mutual fund is providing decent returns but you would like to switch to one with even more returns
  10. Your child is doing good in studies, you want him\her to do better and register him\her at another famous coaching class
  11. Your child is good at swimming, but you would like him\her to be good at dance and also play a musical instrument because many friend’s children do that.
  12. You go for weekly shopping at a mall and return with at least twice the number of items you had on your list and when you cross-check items with your list, you haven’t covered even the half of it.
  13. .
  14. .
  15. List can go on…

From all above examples you can see that, mistaking wants for needs is going to take toll on your budget and eventually you.

Once you know that you must choose consciously, and you keep practicing it, it is not that difficult. In case of doubt, ask three simple questions to yourself:

  1. Are you doing something just because you can afford to do it?
  2. Do you think you may ever regret doing it?
  3. Can you do without doing it?

Now let’s take first example in the list and try to apply these questions. For better fitment I will put an outside student studying in city in the role-play here.

You are hungry and decide to go for pizza house instead of healthy rice-plate option

Q: Are you doing something just because you can afford to do it?
Ans: Yes. It is start of the month and I have just received monthly pocket money from home.

Q: Do you think you may ever regret doing it?
Ans: Yes. At the end of month if I run out of money received from home, I may regret this overspending.
Q: Can you do without doing it?
Ans: Yes. I can certainly have the rice plate and satiate my hunger.

All Yes means definitely you are falling for a want disguised as need. Revisit your decision. If all answers are No you can go ahead without any doubt. Even if occasionally you decide to go with your wants, make sure that a want remains on wants list. Don’t let your mind trick you into slowly converting a want into a need.

I would like to emphasize one thing at this point. One shouldn’t think that having to make this decision every time is sign of miserliness or deprivation,  because it is not. Rather this practice may help you refraining from making some silly or inappropriate decisions which may hurt you over a long period of time.

Respect your needs and be smart with your wants, that’s it. You will surely be in control of your financial conditions and also be a happier family. It’s a winwin for sure.

Compound Interest – Let your money work for you

Don’t always work for money. Instead make money work hard for you

“Let your money work for you”

 

compound interest

 

I think we must have read / heard this saying many times in life. This is quite a famous quote often used by investment advisers. This is related to power of compounding which is very powerful tool if exploited properly.

If you are someone who wish to have good returns on your investments, wish to retire early, wish to have financial independence you need to exploit power of compounding and make it one of the pillar of your overall financial independence strategy.
I will just give a small example to reiterate the faith in this strategy. For assumption, I have taken 10% as returns on investment which is quite possible in today’s scenario.

If you save INR1,000.00 per month for 12 months, at the end of the year you will be left with INR12000.00

Year 1
You will earn 10% interest making total amount INR12,000.00+INR1,200 = INR13,200

Year 2
You will earn 10% interest on INR13,200 and total amount would be INR13,200+INR1,320=INR14,520

Year 3
You will earn 10% interest on INR14,520 and total amount would be INR14,520+INR1,452 = INR15,972

Year 4
You will earn 10% interest on INR15,972 and total amount would be INR15,972+1,597=INR17,569

Year 5
You will earn 10% interest on INR17,569 and total amount would be INR17,569+INR1,756 = INR19,325

So in 5 years, your initial investment of INR10,000 turned to INR19,325 – You have almost doubled your investment without doing anything
Now, to show the outcome of consistent investing, let’s take a scenario where you invest INR1,000 per month for 5 years that is 60 months and let’s see the result.

Year 1
You have invested INR12,000 and your total amount after 12 months stands at INR12,665

Year 2
You have invested INR24,000 so far and your total amount after 24 months stands at INR26,645

Year 3
You have invested INR36,000 so far and your total amount after 36 months stands at INR42,076

Year 4
You have invested INR48,000 so far and your total amount after 48 months stands at INR59,110

Year 5
You have invested INR60,000 so far and your total amount after 60 months stands at INR77,911

If you continue this investment for 15 years your INR1,000 per month investment becomes INR4,14,774

If you continue this investment for 25 years your 00 per month investment becomes IR13,19,273


————Here the magic unfolds ————

 

If you replace investment amount by INR5,000

If you continue this investment for 15 years your INR5,000 per month investment becomes INR20,73,872

If you continue this investment for 25 years your INR1,000 per month investment becomes INR65,96,367

So your INR5,000 per month investment for 25 years @ 10% per year will yield you INR65,96,367

This is simply a huge amount and can give you a big shot in your retirement Kitty.

You can use any compound interest calculator and tweak rate of returns and amount to see the magic. You will be surprised.

Idea is to find an avenue which gives you maximum return on investment for your risk appetite and to stay invested for a long time (>15years) to reap the benefits of compound interest. Compound interest works miracle with large sum invested for a long duration. The best part is it’s a passive income for you as your money is working for you.

Start as early as possible -> Make regular investmsnts -> Stay invested for a long duration -> Reap the benefits of Compounding

If you delay by a year, you will loose lot of money. Don’t think that you will loose only first year’s interest money if you delay by a year. You will loose interest of the final year if you delay. Do your basic math and you will come to know the losses.

No doubt great Albert Einstein has summed it up correctly

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

 

Focus more on increasing net worth

In the journey to financial independence, the most widely accepted approach is to earn more and more in due course. The formula is quite simple. Earn a good professional degree, gain experience and keep moving up the corporate ladder. This growth will give you thrust in your income too. So more your income is, more you have money.

 

networth & wealth

 

However there is one more catch. What if you are earning INR1, 00,000 per month and your monthly spend stands at INR1, 00,000 per month. This is something which is worrisome. This will be a kind of status-quo where you are placed extremely well in the corporate ladder and earning a handsome paycheck every month. However on asset / net worth front you are ZERO. You will not be able to create any asset which will appreciate and give you good returns in due course.
So, increase in income does not necessarily mean increase in your net worth. On the road to financial freedom, you must focus on increasing net worth and track it month on month so that you have all figures about your financial growth at hand.

It’s great to have a 6 figure monthly income but not focusing on net worth will make you work like a workhorse till you die. Instead of focusing only on increasing income, once must focus on increasing net worth as net worth again will keep increasing thus making a substantial gain on monitory front through investments and asset appreciation. Here you must note that more your income is, more your tax liability will be. However assets you make are taxed in different bracket which is quite less when compared to your tax on income. You are taxed on what you earn, not on what you own.

Off course I am not undermining the importance of increasing income, but if this increase in income is coupled with serious attempts to increase net worth, your hard work will bear fruits much earlier than anticipated.

Why you should focus on net worth:

  • The major component of the tax is computed on the income, not the net worth
  • Higher net worth gives you much more financial security compared to high income levels.
  • High income can be spent easily and loose its value, but higher net worth is not that easy to dilute and spend. This way the assets, equity you create is safe from impulse purchases
  • Net worth always keep growing – the components will keep on working and giving you passive income hence overall net worth will keep increasing

 

How to increase net worth?

  • Practice frugality: This is the first step. This will ensure that your expenses are always less than your income
  • Pay down your debt on war footing: Debts are trap. They suck money in terms of interest. Though monthly payments look small for any debt, especially consumer debt, but if you consider the entire cost of debt, it is indeed a high figure.
  • Track your expenses: This will give you a very clear picture where your money is going month on month. If you keep tracking, it will give you clear alarms about money drains.
  • Have an emergency fund: This will help you in fighting emergencies like car break down, home repairs, sudden job loss etc. You need not to break your fixed deposit or take out money from retirement savings for emergencies.
  • Start investing based on your appetite and with proper asset allocation: This will help you grow your net worth and in turn your wealth. Also a proper investment portfolio gives you a good passive income month on month and is your best buddy in the race towards financial freedom.
  • Find ways to increase your income and keep investing religiously all the raises you get: This will help you in avoiding lifestyle inflation. Believe me lifestyle inflation is the biggest wealth killer. If you divert salary raises towards investments, you are enhancing your wealth in the longer run.
  • Track your net worth month on month: This will give you clear picture of your performance towards your financial freedom. Also this will tell you every month whether you are moving in right direction or not?
  • Look at starting some side hustle, or some side business in addition to your day job: Again this will bring additional money which can be invested again to increase your wealth. Anything which contributes to your wealth speeds up your journey towards financial freedom.
  • Avoid any consumer debt: Again consumer debts are traps. They force you to pay higher amount for the goods and come with processing charges. Plan to pay cash and learn to live within means.

No doubt focus on increasing income is important in creating wealth. But income is only one part of the overall equation which contributes in creating wealth. But focus on net worth will make you an individual with multi pronged approach on creating wealth.

Save TONS of cash with timely home maintenance

A home is usually one of the biggest purchases in terms of price tag one will ever make. Real Estate costs a big chunk of money going in as down payment and a commitment of 15-20 years in terms of the monthly EMI going against the home loan / mortgage.

In addition to this, homes attract various other monthly outgoes such as

  • Insurance premiums
  • Association charges
  • Annual property dues
  • Electricity charges
  • Water supply charges
  • Any other tax imposed by local authorities

 

timely home maintenance

 

If you add up all the above mentioned charges, homes do cost a bomb. But even after paying a bomb, home can be a big drainer of cash if not maintained properly.

Home cannot be “buy and forget”. Instead it must be treated like your car or your bike. You have to do regular maintenance, oil changes, check Tire pressure, do washing and cleaning, fix up damaged parts of your vehicle in order to use it regularly without any problem. If you miss out a couple of cycles of maintenance, your car may stall during an important journey and you may end up spending a huge sum to bring it back in working condition. If you service your car properly, keep it clean, wash it, take care of electrical, change oil as prescribed in manual – you can use it for years and it will never let you down in any of the journey you undertake. Above all you can always get a good resale value. Potential buyers do consider looking at the maintenance record of automobile before striking the deal.

Same is with the real estate/ house.
The list of things which can go wrong if not maintained can go very long.

  • Not keeping bathrooms clean can hamper the outlet of water and can flood your home causing serious damage to your furniture. 
  • Not maintaining AC/Fans can make them stop functioning and can incur heavy cash damage to you. 
  • Not regularly painting the house can make the plaster weak; it may come off and might hamper the resale value considerably 
  • Accumulation of dust particles can take sheen off from the shiny furniture and make them look like scrape material 
  • Not doing regular service / replacement of electrical fittings can cause electrical short circuit and can damage the entire household furniture due to fire 
  • Not taking care of bathroom fittings can damage them and they can start rusting and become useless. Believe me it costs a lot to replace these fittings 
  • Not trimming grass in the lawn will make it look really bad and the sight is not inviting for the visitors at your place. 
  • Unclean flooring can lead to the damage tiles which in turn can decrease potential resale value of your home

There can be n number of line items which can be added in the above list. Bottom line is – the home must be kept well maintained. It gives positivity to your own life plus it increases the life and worth of your home. Later if you wish to upgrade, you can sell your home at good price if you have kept is presentable to potential buyers.

The approach to keep your home properly maintained is very simple

  • However busy you are with your schedule, take time out on weekends, make a schedule and pay attention towards one item per week and make sure on monthly basis you cover all important items from the list once. 
  • This will ensure that your property is safe, appreciates in value and looks good to any visitor coming to your place. 
  • You can plan it in such a way that first Sunday of a month clean all fans, fridge, electrical boards, sockets and check for all electrical fittings. 
  • Second Sunday typically can be spent in dusting your furniture and glass items, arranging your reading interests. 
  • Third Sunday can be spent in cleaning bathrooms thoroughly (apart from regular alternate harpik cleaning) and cleaning of drainage outlets like sinks, kitchen wash basins, balcony outlet for any blockages. 
  • Fourth Sunday can be dedicated to floor cleaning, removing stains, kitchen cabinets/tabletops/counter tops cleaning, and keeping / refilling insecticides and anti rodent. 
  • Make schedule every alternate year to paint the walls and use superior quality of paint which lasts longer. 
  • Exterior painting should also be done at regular interval with superior quality of washable paint. A monthly outside wash can work magic on the exterior looks of your home. 
  • Weeding and landscaping your lawn monthly can make them look better and they will certainly make your house inviting for the visitors.

A small schedule can make your home last longer and can increase its value over time. Above all it can save you tons of money that can go into drain by handling emergency maintenance arising of negligence.

Timely maintenance can also help you in creating and increasing your wealth. more the price of your home, more wealthy you would be.