[Updated: 20th April, 2018]
Why people fail at financial planning?
Because most of the people are not disciplined in savings & investments and they spend more than their income.
and I was not an exception!
I too made the same mistakes…..
I made the same mistakes when I joined my first job. I wasted money on the things that I did not need. I bought a new bike while my old bike was running fine.
I never saved in a systematic manner. I used to spend 90% of my salary by the end of the month. I invested the leftover money randomly in Investment Plans, Mutual Funds, Fixed Deposits and PPFs.
Unfortunately, some months were so expensive that I could not save even a single paisa.
I got married and had only 10,000 rupees in my account. It was embarrassing when my wife asked to buy an air conditioner and I said let’s wait till we get salary next month.
I learned from my mistakes.
Let me share some of the easiest ways to automate your financial system
Select Your Favorite Section
- First Step of Financial Management
- #1. List of Income source?
- #2. How much are the monthly expenses?
- #3. What are your Liabilities?
- #4. Do you have an Emergency Fund?
- #5. Do you have a Medical and Life Insurance?
- #6. What are your plans for Retirement Fund?
- #7. Do you plan savings based on your financial goals?
- #8. How much are your Unexpected Expenses?
- #9. How much you spend on Pleasure & Leisure?
- How to allocate funds?
- What about Investments?
- A better view of expenses and investments
First Step of Financial Management
Find out answers to the following questions.
#1. List of Income source?
In my case, it was my salary and my wife’s salary
#2. How much are the monthly expenses?
Rent, grocery, fuel, daily needs
#3. What are your Liabilities?
I had to pay home loan, education loan, and a car loan
#4. Do you have an Emergency Fund?
I did not create any fund for emergency use until I got married. Shame on me, but you should not repeat my mistakes.
#5. Do you have a Medical and Life Insurance?
My Bad, I was dependent on company provided insurances. Everyone should have additional insurance cover on a personal level even when their company provide group insurance.
#6. What are your plans for Retirement Fund?
I had only Employee Provident Fund contribution because that was mandatory. Let me tell you one bitter truth, EPF is not sufficient for your retirement.
#7. Do you plan savings based on your financial goals?
I did not have any clue what the f*ck is goal-based saving.
#8. How much are your Unexpected Expenses?
You don’t count but you have to attend marriages and birthdays in a year. It’s an unexpected expense. You have to do shopping for yourself to look good in parties. You have to buy gifts for special occasions. You have to travel unexpectedly.
These unexpected expenses are expected every year. Just count roughly how much you spent on these occasions last year.
Other unexpected expenses are medical, legal and maintenance. What if someone from your family fall sick and insurance do not cover. What if you get a fine or legal notice from income tax department or traffic police. What if your home appliance gets broken?
Life is all about unexpected things!! You should keep a buffer aside for unexpected expenses (do not confuse with emergency fund that is for a different purpose)
#9. How much you spend on Pleasure & Leisure?
You might be hearing this first time, it’s most juicy part of financial system.
If you plan well and already taken care of all previous points then leftover money is your free money, do whatever you want to do with it. No questions from wife, no questions from your inner self. Just spend on anything you wished so far.
How to allocate funds?
You should prepare a table, allocating right percentage of your income to your potential expenses.
| Expense Category | % | Example |
| Monthly Expenses | 40% | rent, grocery, fuel, travel, daily needs |
| Liabilities | 20% | EMIs |
| Emergency Fund | 5% | Only for the emergency |
| Insurances | 1% | medical, life, vehicle |
| Retirement Savings | 2% | PPF, NPS |
| Goal based savings | 20% | Home, Furniture, Vacation, Electronics, iPhone, Education, Marriage |
| Buffer for Unexpected | 5% | Gifts, bribes, fines/fees, |
| Pleasure & Leisure money | 7% | Dine-in, buying a lovely piece of jewelry, buying those expensive shoes that you don’t need but always dream of. |
What about Investments?
Once you understand what you need and when you need, then only you should raise the question “Where should I invest the money?”
Investment has three purposes.
- To safe lock your money because you don’t want to keep as cash at home (unless it’s the black money)
- Earn some interest on your money, apparently increasing your money over time without doing anything.
- Increasing your wealth. Investing in instruments where you can beat the inflation and grow your money.
Now things should be clear.
Don’t just invest for sake of investing or saving few bucks on income tax (most of investments happen in Feb-Mar to save income tax…. that’s funny).
If purpose of your future expenses is clear then you can take a wise decision on your investments.
You may also like to read – Best credit card in India 2018
A better view of expenses and investments
Now look at possible options where your money should be parked based on expense category
| Expense Category | Example | Type of Investment Account |
| Monthly Expenses | rent, grocery, fuel, travel, daily needs, phone/electricity/credit-card bills | Saving Account |
| Liabilities | EMIs | Loan |
| Emergency Fund | Only for emergency | Mutual Funds / Equity |
| Insurances | medical, life, vehicle | Recurring Deposit |
| Retirement Savings | PPF, NPS | PPF, NPS |
| Goal based savings | Home, Furniture, Vacation, Electronics, iPhone, Education, Marriage | FD, RD, Mutual Funds, Equity (based on the tenure and priority of goal) |
| Buffer for Unexpected | Gifts, bribes, fines/fees, | Mutual Funds, Equity |
| Pleasure & Leisure money | Dine-in, buying a lovely piece of jewelry, buying those expensive shoes that you don’t need but always dream of. | Saving Account, Mutual Funds, Equity |
Here is the cash flow of your income. Make best use of it for your financial planning.
Now you just have to utilize the power of online banking and set auto payments of each category. Here are some additional suggestions that will smoothen your financial life.
- Keep a separate account for your salary and expense. I have two accounts in ICICI bank, both linked with single online banking.
- In one account I used to receive the salary when I was doing my job (my Income account).
- I set up auto debit for transferring money to each category of investments shown in cash flow chart.
- Another account (Expense account), I used for paying credit card, monthly bills, rent and cash for monthly expenses.
- Keep separate investment tracking for each category. If you are investing in mutual funds for more than one category then keep a track in portfolio management free tools like moneycontrol.
Let me know if you found this article helpful.
This post is inspired from Ramit Sethi’s guide on automating finances.
Please write in the comments ‘what mistakes you are doing with your financial system and how you are planning to improve?”
Good insight
Thanks Purushottam!
Unexpected Expenses and Emergency Fund :
To me the both looks same purpose. How do you differentiate these two funds.
Unexpected Expenses in this article context are Misc expenses… You know that you have to spend some money on parties and travel but you don’t know how much.
Emergency Fund is your own banker when life takes you to a deep hole, like medical emergency or a riot like recent happening in Haryana. So that you don’t have to look upto your relatives for loan.
Hope its clear now!
Nice Write-up Pradeep especially I like the flow diagram which clearly depicts the Cash inflow and outflow. Somehow, I agree with above comment by dear Vandhi. Both Unexpected and Emergency fund can’t be measured and one doesn’t know the figure of how much to keep. Standard rule is 8-10 months of monthly expense. If your Emergency fund is full, you don’t require a separate Unexpected Fund as you can use your emergency fund and refill it. Keeping it more simple. Well, the more you bring heads, the more complex it becomes. Also, one should have very minimal goals (not more than 4-5) just because of same above reasons. Thank you. 🙂
Debojyoti,
Unexpected funds are not emergency funds. You take some buffer of expenses in case your cousin is getting married, and similar sort of events will happen every year – so you use your unexpected funds annually.
Emergency funds are used only in case someone lost primary source of income or in case of medical emergency when you need money over and above of your medical insurance – see both are rare cases – hence emergency.
“Unexpected funds should actually be referred as a “sinking fund” based on needs which are expected to arise during an year.
Good categorization Pardeep. I’ll try to use it, especially of keeping two separate accounts – for income and expenditure.
Well written!
great work
good to know expenses under different heads…..
want to recommend book on personnel finance aam aadmis guide to money by sharath kommaraju , and other authors as usual like,kiyosaki, micheal mastorson , rajat sharma’s blog and yogesh chabriya for stocks, etc just for fyi.hope can write personal finance like you and them someday…err….
regds
krutik
Thanks Krutik. I am fan of R.Kiyosaki, will take a look at blogs that you mentioned.
Wish you best.
Hi, very informative article.
I am 28 years old and I am searching for good investment options. I just came to know about peer to peer lending as an emerging platform in India and wanted your views on that.
I have not tried P2P lending because of the risks associated with it. You can try and share your experience with me. We can write an article from our reader’s experience as well.
I researched on the web and found out some good p2p lending platforms like http://www.loankuber.com/. I am thinking of investing a small amount to start with.
how to open call for pastnership & pvt ltd with give idea for save tax of comp.
It depends on your business revenue and structure. I would go with partnership firm if I have low revenue and don’t want to invite external investors.
how to talk to custmer to which script with talk abuot save tax.how?
Hi Pradeep,
Thanks for your blog, which providing good information about personal finance, i feel the allocation of savings holds good for a married without kids, people with kids would be totally different equation, would like your views on this
You are right Madhava. Every major event in life changes our spending habits and we should re-plan. The events can be marriage, kids, job-loss, promotion, or divorse.
Very nice article, specially cash flow diagram, it makes it even more clear. its commendable how without getting into complex details you wrote the article in so easy language easily understandable by a common man/ woman.
Very nice article, specially cash flow diagram, it makes it even more clear. its commendable how without getting into complex details you wrote the article in so easy language easily understandable by a common man/ woman.
Thanks Rupali.
LOL….5% for bribe……. 😛 Good calculations, Pradeep.
Good catch! Unexpected things happen in life. We should be prepared financially 🙂
Agreed bhai…. 🙂
Following your blog regularly. Very informative.
Are you investing in NPS? What’s your view on this?
After reading your article, I came to know what I was doing wrong. from Sep 2016, I m making note of all the expenses I have done. But, I was mixing us 3 or 4 things that you have listed separately, like grocery expenses, insurance (bike and car), Dining out, travel into one.
I have only salary as an income. I currently have a home loan as a liability. I m totally dependent on Company group term and medical insurance. I think I have to make some changes with my financial management.
Sir, Now I am at 27 age I don’t have any income other than pf and LIC and pli .how to build income . what are different way for gaining income .I have zero. Knowledge on shares and mutual fund etc