A life-saving skill

We all pay a lot of attention to learn various soft skills. But a life skill which is certainly under rated but is the most important is - Financial skills.

It is a skill which should be taught at high school, at the least in college. It is unfair to leave that skill with only financial professionals.

Financial planning is a subject of its own, diverse options to understand, various aspects to consider. Also, it is like your health. One cannot and should not use general advice. Everyone's requirement, commitments, salary, situation, needs, goals are different. Hence everyone's financial plan will be unique and different.

The best way to draw a perfect financial plan is to take advise from a financial professional. But it is a life skill to know the basics at the least so that you know how to start. In this article I will be highlighting those basics of managing finances.

What do I mean by financial skills?

Financial skill includes:

• Planning a budget of monthly expenses
• Accounting for every expense
• Foreseeing major future expenses and planning to save for them
• Identifying your surplus if any
• Understanding the various investment options and choosing the right one at the right stage of your life, for your surplus.

Well, we certainly cannot cover all the above topics in one article, but I aim to create awareness and impart basic skills to via KaizenEdu - Financial skills.

In this article, I will be discussing the three steps of managing finances and at the end of the article,I have put down an example financial plan. But please do read all the content before you go to the example. Example is only an 'example plan', having a complete understanding will help you the most.

Living by yourself or gaining financial freedom can be exciting. But when you must plan your expenses, savings, and investments with the money you earn it can become daunting and scary. The below inputs can be taken whether you are in India or abroad, exceptoptions mentioned in step 3 - investments as it will vary from country to country.

Who is this article for?

• If you have just started earning or just started to live by yourself in India or abroad as a student, this article is apt for you.
• Even if you are in the first 5 years of employment or been earning salary and recently married, this is for you as well.
• Yet, it is never too late so irrespective of which stage you are in, if you want to learn some skills and start afresh, you are in the right place.

Ok let us cut to the chase - How to start managing your finances, stepwise:

1. Budget of your expenses

This is the first step of financial planning.

It is of extreme importance to first understand your monthly expenses. You must face the bitter truth to start your journey towards financial solace! List down all your expenses by categorising them all - Housing, food, commute, entertainment, health and beauty, subscriptions, insurance to name a few. Adjust the money for each category to fit within your income.

Some points to keep in mind

• Categorise wisely. It is ok to have many categories. Simply clubbing 2-3 different type of expense into one will overestimate a category unnecessarily. Restaurant visits are better categorised as your entertainment expenses instead of food as 'food' would cover your grocery & provisions purchased for the month.
• It is common for people to ignore expenses of small expenses (say of less than Rs.100), but as we know droplets combine to become an ocean. A combination of all those ignored small expenses can combine to become one big 'unknown' expense.
• Yes, set aside for your entertainment expenses too - say, restaurant, movies, weekend getaways. Everyone of us need time off for entertainment and unwinding. It is better to put a number to it and set aside than to feel guilty each time you indulge in entertainment unsure if it is within the budget or beyond.
• Another doubt one may have at this stage - how to deal with reimbursable expenses? You may have some expenses which will be reimbursed by your employer at a future date, say commute to work. The most important words here are 'future date'. So currently it is an expense. It could be treated as an income in that future date when you receive it.

I recently saw a post by a doctor who suspects to have received a higher pay from his employerthe last couple of months and wanted to get an idea to read a payslip to understand why exactly he has received more. In the post he also went on to mention that he has no idea how much he usually earns and how much he usually spends!

Only one thing to say to this - if you fail to plan, you plan to fail!

I have also noticed lot of my younger counterparts in the dark aboutfinancial planning. Well, managing finances is a lot more than investing in latest trends such as mutual funds. Not their fault - after all topics like algebra & trigonometry we studied in high school certainly does not help any one to manage finances, plan investments or file income tax returns.

2. Foresee and save

The second step is to SAVE, NOT INVEST.

Ideally after the budgeted expenses, you have some money left from your income. Do not rush to invest. Understand that you will have some major spends soon. So, save categorically.

Let us face it: Saving is different from investing- When you save you set aside money sometimes earning some interest on it to cover inflation. Savings is to cover your short-term future.While investment is where you put your money into an asset or an instrument to see your money grow as the asset/instrument increases in value. This is usually to benefit us on the long term.

We first must cover our near future and save to have liquid money for our major spends before we put our money into an asset/instrument and cover our far future. The idea is to make your money speak for you; you don't have to crunch your expenses to invest from your first month of salary.

When you do save, it is important you categorise and time your savings. To do this you need to foresee. There are two ways of doing it:

• List down all the major expenses you are expecting to incur in the next couple of months to one year - Specific gadget purchase, vehicle purchase, furniture purchase, home makeover etc. Once you have the list, put a number to every category, then put a date when you are likely to spend that money. Now, simple divide the number by the number of months you have till you expect to spend. That will be the amount you have to save for that category monthly.
• Another way of doing it is, recognising regular major spends such as long trips, personal shopping, vehicle maintenance etc. Save a fixed amount monthly on a recurring basis.

You can either set this money aside into a separate savings account or create RD's (Recurring Deposit which has an average of 4% p.a interest as on 2022) for each category to earn more interest in comparison to a savings account.

3. Surplus = Investment

After setting aside to save if you still have some money left - that is surplus. You can finally plan to invest.

It is okay, even if you do not have any surplus. It is important to support yourself with your budgeted expenses and your near future major spends before you put your money into an asset/instrument.

Investment is a huge subject by itself, and you will find articles on KaizenEdu by on this topic.
To touch base, I shall mention the aspects to consider when you choose an investment option and list down investment options available in India.

Aspects to consider when you choose an investment option

• Returns - Compare the returns promised in all options
• Income tax benefit - Look for income tax benefits in the form of 'Chapter VIA Deductions/Any Sub-section under Section 80 Deductions'
• Safety - Some options provide you a risk-free guaranteed returns such as PF, Government bonds, FD, RD while anything on the share market including mutual funds carry an amount of risk and hence would not give you guaranteed returns. Be aware of them and decidewhether you can bear that risk/loss.

Investment options in India

• Public provident fund (A long term option where you have to invest for atleast 15 years with a risk free 7.1% p.a interest as on 2022)
• Government bonds (Various department issue bonds which provide risk free interest)
• Gold bonds (A wonderful way to take benefit of gold prices while not staking up actual gold at home and to earn an interest of 2.5% p.ain addition on principal invested)
• House/A site (An option which requires a heavier investment but also promises heavy returns)
• Shares/Debentures from the share market (Companies prioritise paying interest on debentures than dividends on shares. Hence on comparing risk involved in the two, debentures have lesser risk.)
• Mutual funds/SIPs (Mutual fundsis a combination of shares of various companies put together and further broken down. SIP is a type of mutual fund giving investors an option to invest lesser amounts monthly. The returns offered could vary between 1% to 10% or more p.a but there are various types of risks involved.)

Example financial plan 2022-23

A married couple aged 25-30, both working and living by themselves in a metro city in South India.Salary is the only income for both.

Disclaimer: This is only an example based on various assumptions. This should not be considered as plan drawn for you. Situations, goals, and necessities of each one of you could be quite different. It is essential you consider all your personal factors to draw up your unique plan.

• Net pay of 2 - Rs. 1,20,000
• Budgeted expenses - Rs. 69,700 (Balance - Rs, 50,300):
• Rent - Rs. 25,000 (2 BHK house)
• Bills - Rs. 1000 (Electricity, Water, Gas)
• Food - Rs. 15,000 (Groceries, Provisions)
• Subscriptions- Rs. 1000 (Mobile, TV, 2 OTTs)
• Health Insurance - Rs. 1200
• Commute- Rs. 4500 (1 bike with 40 KMPL mileage/Bus pass for 1 + 1 car 30 KMPL mileage. Petrol price considered - Rs. 105/L)
• Health &Fitness - Rs. 2500 (Gym, Medicines)
• Beauty- Rs. 1500 (Parlour visits)
• Entertainment- Rs. 8000 (Restaurants, Movie, Weekend getaways,Spa)
• Transfer to Parents' account - Rs. 10,000
• Savings - Rs. 34,000 (Balance - Rs. 16,300)
• Vehicle/Electronic/Gadget purchase - Rs. 10,000[Can afford a purchase every 4 months]
• Vehicle maintenance - Rs. 2000 (Service, Annual insurance, Damages for a hatchback car)
• Long trips- Rs. 17,000 [Can afford a long trip within India every 3 months OR a short trip to a country nearby every 10 months.]
• Personal shopping - Rs. 5000
• *Once total net salary increases by Rs. 25000, to start saving the same to buy a house in 5 years' time.

Investments with balance - Rs. 16,300
1st month - One time investment on GOI Gold bonds (3 units) - Approx Rs. 14,500
2nd month onwards -

• PPF 1 - Rs. 8150 (7.1% p.a in 2022)[Post retirement protection]
• PPF2 - Rs. 8150 (7.1% p.a in 2022) [Post retirement protection]

Wish you financial solace!