Overshooting Your Budget? Time To Change Your Spending Equation

Earnings – Expenses = Savings is an old mantra, says Sonia Verma, Regional Head of Accounting & Reporting, APAC, Allianz Partners. Learn the new equation and more tips to save more and grow more.

The mantra of managing your finances is very simple, as says the famous investor and business tycoon, Warren Buffet in his lines “Do not save what is left after spending, but spend what is left after saving.”

So, to successfully manage your budget, first is to change the equation as below: Move away from Earnings – Expenses = Savings TO Earnings –  Savings = Expenses

Understanding the three elements of the equation

Most of us have a feeling that we have a limited control over our earnings. Well, that’s true to a certain extent but it’s not really a limiting factor. Using another famous quote of Warren Buffet for inspiration, “Never depend on single income. Make investment to create a second source.”

This investment is not necessarily a monetary investment like capital to start a business but also includes investing in yourself like learning a new skill or using your untapped talent. To give you an example, one of my friends who has been a home maker for good 10 years had a keen interest in painting. She paints really well, starting from canvas to fabric to pottery to glass. But she never thought of using her talent since she was busy with her household responsibilities and the upbringing of her children. One day she had painted a beautiful canvas which was so well appreciated by some visitors at her place that they wanted to take it. She offered it for free but they still gave her a token of appreciation as a good gesture. This small incident inspired her so much that she started painting more often, made a Whatsapp group of her friends and started selling her products. Growing strength to strength, she now boasts of a Whatsapp group of 200+ customers where her products are in great demand. She now plans to go online in early next year. The moral of this story is that the limitations are in our head. If we don’t see things beyond our horizon, we may lose out on our talent and passions.

This was about using your existing talent but you can develop new skills, go into different fields of your interest. As the world is is coming closer due to globalisation and virtual means, the opportunities are massive. There are many people learning photography, cooking and and even programming are just a few examples. The key is to identify your interest or talent, leaning or polishing your skill and having the right network of people around you to use your skill in a more commercial way to augment your earning. Remember to build a good network of people around you.
Your net worth is your network!

Let’s uncode spending needs and habits

Next, lets focus on spending. Again, I will start with quote from Warren Buffet to take the inspiration from. He says, “If you buy things you do not need, soon you will have to sell things that you need.”

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In this era of online shopping, we easily get influenced by the pop ups with amazing discounts on brands we love, with tendency to pay via credit cards or EMI, the trap of overshooting the budget is quite easy to get into. Quite a lot of times we end up spending on non-essentials. Remember the time when you bought a dress just because you liked it so much, bought a phone just because a newer version is launched or did an expensive vacation just to be more socially talked about!!

One of the easy tips to manage spending is to use the spending graphs provided by most of the credit cards. The spending wheel helps you make a conscious effort to track spending. This doesn’t mean you shouldn’t enjoy the luxuries, this simply means you need to give a conscious message to your mind ahead of your spending decision and take a rational call.
As youngsters or freshers at workplace, we all have a temptation to be brand conscious, get a car or jazzy gadgets. The only caution we need to exercise is arrange for the funds before buying rather than doing the purchase and then get into the trap of credit cards over dues where you end up paying 2-3% per month.

As we become mature in our lives, there are certain categories of expenses which are common to all and are non-negotiable and planning for them is something which determines whether your financial decisions are correct or incorrect. The key category of these common expenses are Housing EMI, education, general household expenses, car running and maintenance, parents’ health expenses and few more depending on personal circumstances, make sure you first make a budget for these expenses from your regular source of income and then depending on what is left in the pot, comes personal expenses like brand shopping and fine dining and holidays and all other luxuries. Remember the equation, spend after you save, so have separate budgets for saving and spending then from the budget of spending do the prioritisation like above.

This prioritisation will always help you to manage the budget and motivate you to increase the share of personal expenses which is everyone’s target! If you are not able to control your budgets, sometimes seeing something in front of you makes you realise it better, so track your expenses according to your prioritisation and eventually you will start realising where you are going wrong. There are so many simple online tools/apps available today to track and manage your expenses, make use of them effectively.

The third dimension of saving

And now comes the most important third dimension about saving. Saving is not just putting some money aside to manage any contingency in future but how to smartly invest and create wealth, be self-dependent and proud of yourself! Here is sharing some very common, easily accessible avenues to save your money. You need to exercise caution according to your personal circumstances and choices although these tips are to provide you risk free returns. There are many more avenues to save/invest your money but they are dependent on your risk taking ability and competency to manage like stock markets.

Tip 1: Reduce the uncertainty or unexpected expense on health/illness

Most of us feel very happy that our organisations provide us health insurance and we shouldn’t worry. We forget that this benefit is available only till we are in employment with the organisation. Always take a timely health care policy for yourself and your family. You can also enjoy the tax benefit under 80D and be a good son, daughter or parent. Accumulate No Claim benefits on your personal medical health cover policy if you have a cover provided by your company and you can benefit at a later stage when there will be no hidden clause applicable on your personal medical policy due to No claims for initial years

Always remember health insurance is different than life cover and Life cover is often confused by endowment funds where we end up giving heavy premiums with very less returns and huge administrative expenses. A term insurance plan comes at much lesser premium with life cover. Always remember life cover is an instrument of safety not investment.

Tip 2: Systematic plan in mutual funds with a long term horizon of over 8 years

Diversify the allocation in debt and equity to strike balance and reap more benefits

Tip 3: Housing investment is a must

Always ensure you make an investment with a reputed builder and preferable in a ready to move unit. In the current scenario with increasing delay and default in realty sector one must be careful in picking the housing investment. Don’t get lured by discounts on under construction alone. Tax benefits can only be availed after possession and hence don’t hurry.

Tip 4: Invest in gold 

Investment in gold is different than buying gold jewellery. The returns in jewellery are reduced by making charges and they negate the appreciation by approx. 10%. As an investment in gold has always given great returns of over 10% on a 10 year horizon. Nowadays demat option of Gold saving scheme is also available with annual interest of 3% over and above appreciation in value.

Tip 5: Saving in PF by enhancing your voluntary contribution with employer or open a PPF account

As per regulation, 12% of your basic salary goes to your PF account (plus 12% from employer side) but you can increase your share of 12% to 88% as your voluntary PF. Its as safe as your PF account money, tax free and no administration required as it gets automatically deducted from your salary by the employer. Or you have an option to open a public provident fund account where you can invest maximum Rs.150,000 in a year. Just an investment of Rs 410 per day will yield a return of 40 Lacs after 15 years, 66 lacs after 20 years and over 1 Cr in 25 years. I have made these calculations at a rate of 7.75%. These are totally tax free returns. To gain the benefit of compounding interest start, early in life. This fund will help you manage all your expenses with ease and you will not feel that you have not achieved your retirement goals.

I will end with one last quote from Warren Buffet on investment i.e. “Do not put all eggs in one basket.” So make sure you have a diversified portfolio of investments so that you can minimize the risk and maximize the returns.

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