Blog: How to plan your finances in 10 simple steps

Keeping an account of money spent from a bank account, as cash and through credit card using something as simple as a spreadsheet or in any of the multitude of apps available, gives you an idea on the breakup of your expenses. A few months of keeping a tab of income and expenditure, even in a very rudimentary form, would tell you how to plan a budget for the months ahead. With the information gathered, you can create a financial budget for the coming twelve months under separate detailed heads of expenses with a liberal buffer for miscellaneous and unexpected expenses

Sticking to the budget unfailingly – Once the budget is made and when you start updating the expenses on a regular basis, you would also get a clear idea as to where you stand in real-time as against forecasted expenses. This would help you regulate your expenses to fit the budget. For example; if you overshoot your expenses on travel in a certain month you can make efforts to balance out the deficit by reducing your eating out or movie theater expenses. If you have spent far less on your medical needs in a certain month, that is cue for you to spend the surplus on a short holiday or alternatively add it to your emergency kitty. More than your earnings it is your habits, spending hygiene and attitude towards money that makes you a success or failure financially.

Saving at least 10% of the income every year and benefitting from the power of compounding – A saving of 10 percent of your income is a very conservative target to have. The consistency and discipline in saving and investing along with the effect of compounding can help you amass a very decent fortune in the long term. In his new and widely popular international bestseller ‘The psychology of money’ author Morgan Housel talks about Warren Buffet that ‘ …Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally  a child’ He goes on to add that all his success can’t be attached to his phenomenal investing acumen, but to being a phenomenal investor for three quarters of a century’ This is ample proof to the power of compounding that would support your growth through consistent saving habits

Contributing 10% of the income every year to social causes and charity – Whether we like it or not, we are social animals and our long-term happiness is inextricably attached to the happiness of people around us. The best of us can’t have a clear conscience when we see our fellow beings suffering in want and when it is in our capacity to alleviate their difficulties at least marginally. We keep earning and with each increase in income we also keep moving our financial goals a few steps ahead. The effort to earn more keeps increasing and what we earn is never enough with that outlook. To decide where to stop and decide it is ‘enough’ takes a lot of intent and maturity in thought. The commitment to social causes and charity and the idea of contentment are closely related. Only a person who has distinguished between his wants and needs can commit to putting away a 10 % or more for the benefit of those less privileged than him.  

Reviewing cash balances and bank balances weekly– There is an old adage in India that goes ‘Even if you pour off milk into the river, measure and pour’. It goes on to say how much our ancestors respected wealth and disciplined spending. It is important to know what we have. Especially in this day and age where millions of cyber frauds happen, we need to be very vigilant that our accounts and passwords are all secure and also be sure that at all points we are well covered for all the anticipated spends and outflows.

Being free of credit card debts – Spending more than what you earn or ahead of what you earn can sound like quite the death knell for your financial security and independence. Credit cards are the biggest bait that modern humans face that entices them to fall into the debt trap. These companies stand to gain when we spend a lot and do not pay on time with the debt and interest accumulating on a daily basis. If you must use credit cards for whatever reason, then you need to be particular about paying up the full amount due on or before the due date. This way we get to use the credit period effectively while staying debt and interest free.

Having an ‘indulge myself’ kitty to be spent every month – We work hard for a good life and like you reward your employees or kids on good work done, you are also obligated to extend yourself the same favor. It could be a new watch, a home gym upgrade or a short holiday with friends. It is important to indulge yourself and have funds allocated for that, to feel motivated to continue your good work. You must be your biggest champion and benefactor.

Having a six-month reserve fund set aside to provide for emergencies– Any financial planner worth her salt would always advise you on the necessity of a reserve fund and/or an emergency fund. A sudden unfortunate turn of events in your business, loss of job or illness can cause a temporary stoppage of money inflow. The expenses you have budgeted are not going to stop either and in some cases like an illness it can actually increase the expenses. It is important to provide for such an eventuality. Experts feel that you should have as a reserve for such a situation, a minimum of your 6- month expense budget. Hope for the best and prepare for the worst is the best motto in practicing financial wisdom.

Having a significant amount of insurance set up for the aid of your family in case something was to happen to you – When misfortune knocks at your door, the very least you can do is be prepared for things which are in your control. Ample medical insurance, asset and business insurance and life and vehicle insurance would turn out to be your savior in times like these. A big hospital expense could throw your financial budget astray in no time. With the right insurance policies in place, it is one less of a sword of Damocles that you need to be wary of.

Keeping mortgages and loans to the minimum and having them backed by assets – Yet again, this is a reiteration of the importance of spending within your means. But in modern life it is impossible for most people to be entirely free of loans and mortgages. It is only wise to keep them at a minimum and have an asset backing to pay it off in case required and avoid default and resultant complications. 

If you are looking to inculcate financial wisdom into your daily life and want focused coaching on money management, do write to us at harish@harishrao.world and get to know how we can help you with it. We also have capabilities to help you with your specific needs in the financial planning space. We would love to work with you on this or any other business coaching needs you may have!