The Buyt Desk
A major chunk of Indians spends almost everything they earn and save a little to zero. Good financial planning will help you budget your earnings.
Indians are known to be overspenders. Mostly we end up spending on things that we won’t need in the near future. We fall for ads and peer pressure and empty our pockets. Studies say that many Indians spend 70% of their salary and the salary won’t last a month for one-third of the Indian population. This shows that the major Indian population lacks financial management knowledge and is unaware of future unforeseen events that might need huge funds to come out of the situation. All your money problems can be tackled well by planning your monthly funds. Fund allocation does not mean restriction or spending less but a well-made plan to spend your earnings. Here are 5 topics that will help you make your financial plan
Budgeting
To manage your earnings and do some savings, budgeting your funds is a must. Budgeting is the first step of financial planning. You have to decide how you are going to allocate your money. You have to pen down your total monthly earnings from all sources and all your expenditures. This way you can track your funds and know where you are unnecessarily spending more. Allocate some fixed amount to all your needs and entertainment and stick to this budget. Initially, it might be difficult but going on it will be easier. There are many ways you can budget your funds
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50/30/20 budget – Allocating 50% to fixed needs like insurance, housing, transportation, 30% for wants like shopping, eating out, travelling and last 20% for savings and repaying loans. But this does not work well for people with heavy debts.
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Envelope system – For each category of expenditure you will have an envelope and you can spend it only on that particular activity.
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Pay yourself first – This is reverse budgeting where you will put money into your savings and debt and then you are free to spend the rest.
There are many more such methods and also apps that help you budget your finances and use them well.
Debt
Now that loans are easily available for everything, people opt for credit options while buying almost everything from mobile phones to houses. When you have many debts, it is important to manage them well. There are various kinds of debts and you should understand them so that you can prioritize them when repaying.
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Revolving debt – A debt where you keep spending and make the settlement once a month – like a credit card or a line of credit.
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Non-resolving debt – A debt where you borrow huge funds and repay it slowly – like mortgage, education loan.
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Secured debt – A loan that is brought against collateral – like a housing loan.
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Unsecured debt – A debt that is made with any collateral – like a credit card.
Whatever kind of debt you have, always know the total balance, interest rates, EMI and tentative payoff time. There are apps that help you manage your debts.
Net worth
Your net worth is the difference between the money you own and the money you owe. The money you own is the summation of all your assets including accounts, investments, properties, gold and any other physical asset. The money you owe is the summation of all your debts. Your net worth can be computed by taking out your debts from your assets. Youngsters with education loans may be having a negative net worth. Your goal should be that your current net worth should be higher than that of the previous year irrespective of what loans you take.
Saving
One of the things that you should start doing from the day one you start earning. But many Indians fail to do so. Many start saving in their late 40s or early 50s which is very late. Always save some money for emergencies. Every month set aside some emergency funds. Your emergency fund is the minimum of your 6 monthly earnings. Calculate how much you will need for your retirement and accordingly start saving monthly.
Credit
Credit is your capacity to borrow money. It is measured using credit score and credit report.
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Credit report – It is a list of all your existing debts with complete details. This shows the new lender how responsible you are and if they can trust you with the repayment of new loans.
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Credit score – Numerical representation of credit report is the credit score. 300 is the minimum score which says that you are with a very poor repayment history and may not repay the debt. 850 is the highest score which says that you will 100% repay the loan and have a very good loan repayment history.
