How to become rich: It’s not what you earn, but what you spend that matters
Anushree is a 25-year-old Fashion Stylist at a leading fashion magazine. She earns a competitive salary and aims to save at least 20% of her monthly salary. She recently bought a new car and is currently paying the EMIs. She also spends a part of her salary towards rental & living expenses. Apart from this, Anushree loves to shop, often indulging in shopping sprees. She also enjoys a vibrant social life. However, at the end of the month, Anushree often finds herself struggling for liquidity and can hardly save any portion of her income. Sounds familiar? I am sure that just like Anushree, at some point, all of us have struggled with the “month-end” blues, where our bank accounts don’t necessarily agree with us.
We live in the age of unprecedented opportunities and income levels. With the rise in the average income level, there has been a concurrent change in lifestyle. We also have more ways than ever before to consume and spend and this is something that is just going to continue happening.
Often, we give in to the impulse of buying something without giving any consideration to what impact it might have on our financial lives. “I enjoy each day to the fullest” or “Planning ahead is not my style” might sound very cool, but it represents a rather foolhardy thought process and can prove to be detrimental to your financial health. Extravagant expenses, no thought for future needs and absolutely no financial planning leads people to towards bankruptcy. Thus, making it more important than ever to follow one basic financial rule: “PLAN YOUR FINANCES”. With this rule always in sight, it is easier to save and grow the money you earn, without sacrificing the good life.
So how do you tackle these blues? Does the battle against this “month-end” peril include compromising your current lifestyle?
Usually, you would follow the habit of first meeting all our fixed and variable expenses and then save what is left at the end of the month. This is called Maintaining an expenses budget. However, we recommend an alternate route – Maintaining a savings budget. The reason this works is that while an expense budget might help curb purchases in the short run, but in the long run, it’s very difficult to be disciplined enough to stick to an expense budget. The idea with a savings budget is to set aside 15-25% of your income. This money should be deployed productively in investments, whether cash, debt, equity, or real estate.
Therefore, you will have only 75% -85% of your income for your expenses. Out of this, first, you should pay off your fixed expenses such as EMIs, Insurance Premium, Rent and so on. Post that, the balance income can be used for other purposes such as shopping, entertainment, etc.
You don’t need to earn in crores to end up as a crorepati. Diligent savings and planned investments will get you there too. If you follow this plan consistently, you will surely end up saving and growing your money. This is the principle of “Pay Yourself First”.
Saving and investing money is as important as making money. What you do with your income today determines what you can do with it tomorrow, whether it goes up or down. It’s just not productive to think, “I’ll definitely start saving when I make more money” or “I don’t make enough to save, so I should first concentrate on increasing my income”. Instead, focus on saving, even if the amount seems minuscule. In the future, every rupee will add up to ensure a secure future. So, it’s best to start as early as possible because there’s no wrong time to do the right thing.
Courtesy: Financial Times