What are money leaks? How to find out your money leaks and plug them?
“A money leak in a simple language is the money you have spent but you don’t know where you spent. “
Money leaks are just like water leaks from a container. End of the day you don’t know that water is leaking and container becomes empty.
“For example you draw INR 2000 from ATM on the way back to home from workplace. You buy grocery for INR 1000 , vegetables for INR 750, stationery items for INR 150 and have a coffee for INR 100. Somehow next day you forgot that you had coffee previous night and you still think you have INR100 with you from previous withdrawal. This FORGOTTEN INR100 is the “Money Leak” for you. So when you sit down to write expenses over the weekend, you are able to account for INR 1900 out of INR 2000 withdrawn from ATM and unable to account for INR 100 you spent on your coffee.”
Ok Great. But I am good at accounts and I can remember what expenses I incur. So Money leak for me is out of question.
Good. but still as the phrase indicates “money leak” is small expense here and there which is tough to account for at a later date. You may not remember or you may not be knowing the money going out for some expense. But these small expenses can add up later and over a period of time can be a big financial disaster for you. If you compute total spend over a large period say 5 years, these leaks can set you back by a huge amount when you consider the principal amount as well as loss of investment potential of the leaked money. It can directly affect your net worth and can play a spoilsport while planning your financial independence.
Hmm Sounds scary. Can you list down few other money leaks so that I get more clarity on where else i am losing money to Money Leaks?
- Paying upfront for a subscription:
You make a resolution to stay fit on the new year eve. First day of the new year you go to the best Gym in the neighborhood and register yourself. The gym has an offer that you pay for 12 months upfront and you get 13th month free. You succumb to the offer and pay for the 12 months at on go. You are pumped up and start visiting the gym. After about a week or two, you come to know that Gym is about 10 minutes away and by the time you return from work it’s already late evening. You don’t have energy left to change and again drive for 10 minutes to the gym , work out for 30-45 mins and come back late night. Hence you gradually stop going to the gym. This is a big money leak. You have paid for 12 months to the gym upfront and you are not using it
- Not switching off power appliances:
The electrical appliances at home are always switched on like AC/Heating/Fans/Lights /modem etc and often you forget to switch them off when you leave home. This is the reason why you bang your head every month when electricity bill comes.
- Having low rated power appliances:
Electrical appliances at home are not rated good for energy savings hence they drain more electricity and you end up paying more charges for electricity consumption.
- Having multiple bank accounts:
You have to maintain a certain minimum balance in each of the account which makes your money sit in a low interest savings account. You are losing on investment potential with the idle money.
- Buying too big vehicle :
You do not need a truck type gas guzzling SUV for a nuclear family living in city. You will not be able to use vehicle to its full potential. For a city you need a good mileage vehicle which is small so that you can squeeze it in tight parking spaces. A big car means higher monthly payments, high insurance premium, high maintenance cost and lot of inconveniences when taking it around the city which has usually tight parking spaces.
- Buying too big house :
For a nuclear or small family you do not need too big house. Bank will always try to convince you to buy the biggest lot available based on your monthly income. Their logic is monthly payments will not pinch you after few years. But what about now? A big house always has higher monthly payments, higher maintenance cost per square feet, higher property tax and not to mention, higher cost of upkeep. It also consumes higher electricity in terms of cooling, heating etc.
- Paying your fund manager for frequent switching of funds/stocks through Portfolio management service (PMS) :
Fund managers will switch frequently but the cost of switching would be recovered from you as an investor. At the end of the day, the absolute returns will tell you that how much the switching has costed you.
- Not shopping around while taking any insurance : This can cost you dear as there is a considerable swing in the premium paid from different service providers. If you lock in higher premium, entire life you would be paying higher premium which over the years will result in huge money drain.
- Not doing price comparison and proper research before purchasing any expensive item :
Here again the price can vary from store to store. Best is to compare the prices online and then hit the shop for bargaining.
- Having multiple internet data connection at home:
If everyone in the family has his/her own plan for data connection, there will be money going into drain. Almost all service providers give family plan for voice and data or some group connection which can save tons of money over a period.
- A big sum of money sitting idle in savings account:
This also a big money leak. You lose a good 3%-4% on earnings plus the investment potential of the money.
I can quote a 100 more examples from day to day life where there is money leak. I am sure most of the readers too would not be knowing points mentioned above to a certain extent.
Yes, even I was not knowing few things like letting money sit idle in savings account, choosing insurance premium etc. It’s scary. Now, tell me how to identify and avoid money leaks in real life?
Again avoiding money leaks is not a rocket science. It’s more of a common sense. You need to be vigilant about what expenses you incur, make a note of them and review the expense sheet periodically. You are home if you follow this diligently.
Below are few simple steps which you can take to find money leaks and fix them so that they don’t trouble your finances.
- Save all receipts of every payment you make for the entire month and tally them at the end of the month so that you don’t miss out on any ghost expense.
- Use a budget and STICK TO IT. Click here to know how to make a simple budget.
- Avoid money leak places. For example when you go to multiplex to watch a movie, avoid food court during the break. The price of food items and beverages there are exorbitant. Nothing can justify the prices they have. A family can be down by a couple of thousand rupees if they snack and drink at the multiplex food court.
- While visiting malls , do not buy anything expensive just because there is discount on the price. Always compare prices across different places, research the product well and then only buy.
- Beginning of every year, do review all the memberships and subscriptions. Cancel anything which is not required.
- Study a little bit on how to invest money in mutual funds, stocks, bonds etc. Trust me it is not difficult and if you know what you are doing, you can save tons of money. Plenty of FREE study material available online and plenty of tools to invest makes it easy for you if you know the basics of investing. Why to pay someone else to manage your money? Do you think they will do a fair job?
Again it depends on an individual to what extent he / she is able to identify and plug the money leaks. Ideally one should start with every service provider, day to day shopping, monthly grocery shopping and identify where they are leaking money.
After reading this article I am sure you should be able to identify money leaks and then take measures to plug the leaks. First cycle of identifying and fixing money leaks may take little time but once you are set, it won’t be difficult for you to identify leaks immediately and fix them. Money leak should be tackled on priority as it’s a big hindrance in wealth creation and can cause a considerable delay to your financial independence.
Happy Investing !!!