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Overspending – the biggest block in financial freedom

We dream about having nice things, big cars, nice homes, latest gadgets, fancy cloths. The moment we start working after graduating from university, we start accumulating the things we dreamt as a kid or student. Thanks to the media around us – be it print media, social media, electronic media, TV channels blaring advertisements 24X7. They make us convinced that if we do not owe the latest, we are not human in sync with the world. The tone of modern day advertisements is that we are inferior if we do not have the latest gadget, latest fashion.

Overspending - hurdle in personal finance

 

Once the income starts coming in Post University, we welcome all the stuff, toys to keep us happy. We submit ourselves to frequent outings with friends and relatives and many more things which we could not do being a student. Owing the stuff and frequenting restaurants is considered as a new COOL. Suddenly we feel urge to buy new automobile because all our peers have one. We want to outshine our peers hence we want the best automobile, fully loaded with all amenities – just to show off and in our heart we feel “we deserve it”. We look to get hold of the well deserved large house in the toniest neighborhood which we were eying from long. Consumer credit is readily available. This gives us a good excuse to buy the latest 80 inch 3D LED. Obviously we need these gadgets to flaunt ourselves in our circle. Also this reflects in the society that I am cool and doing well in my professional life.

We try to do everything except saving & investing money. It’s always good to pretend that we do not have sufficient income to start investing now and we will have much better success with investments when we have higher income than what we are earning now. A big chunk of our earning is dedicated to the monthly payments that are going out for the nice house, a big car, 80 inch 3D LED and many more gadgets which we have accumulated – just to show off that we are doing well.

This tendency to spend salary as and when it comes makes us struggle financially month on month. Every month we have a list of TO BUY and the list never gets trimmed. One item leaves the list, another item occupies the place. So what can we do if we are making 6 figure incomes and still struggling to pay for necessities to survive day to day life? We must put a cap on non – essential spending. Cut it down so that we have precious cash saved for essential spending and investing. It will hurt for a month or two, but we will not die if we do not have latest iphone 7 in our kitty or if we do not have the latest Honda or Toyota parked in our garage.

Unless we stop spending recklessly, we will not come to know what is essential and what is non essential spending.

A simple plan: How can we check overspending

1. Make a list of monthly expenses without which we cannot live like Home loan EMI (mortgage), electricity bill, maintenance charges, telephone bill, and internet bill. Mark them as NEED

2. In another list, keep all expenses which are our WANTS, like eating out, buying latest phones, new cloths, and outings during weekends etc.

Now once the list is made, strictly write every penny that you spend under respective list. Over a month or two you will get a very clear picture that what you are spending on essential items and what is being spent on non-essential. Cut down on non essential, put brakes and see the magic. In a couple of months you will have a very positive cash flow and loads of money freed up for investing.

This is basic money management, not a rocket science. We need not to be an expert in finance to make money work for us.

Overspending has to be tackled at the earliest if you are not having a positive cash flow month on month. Overspending can ruin your retirement plans and can even upset your life’s balance sheet. If you wish to retire early to pursue your passion, if you are looking for financial independence, if you want to generate passive income so that you do not have to depend on your day job – you must sit down and do the basic exercise to assess your expenses and come harsh on overspending.

Believe me; cutting down overspending can work miracles on your cash flow. You can free up a lot of money which can be invested judiciously to generate good returns over a period of time.

Recipe – How to be wealthy ?

If you blow up all the money you earn every month, you will always struggle financially

We all need money to survive in this world. The reason why you and I wake up every morning and doesn’t matter how dreadful is our job, we go to work religiously to work every morning. We go to work to pay our monthly bills, have a roof on head, have food on table for you and your immediate family, pay for the commute etc. These are all known as basic needs. Almost all of us earn enough to take care of our basic needs.

How to be rich

We all want bigger home, nicer car, to dine out in better restaurant, more and more nice and trendy apparels for our wardrobe, latest smart phones, latest gadgets and the list never ends. The reality is that a majority of working class spend their entire salary what they earn every month. By month end they have to wait for the next salary to come in to take care of their basic needs & never ending list of wants. This cycle repeats every month and the same way every year.

If the above description portrays what you are, indeed you are in deep trouble. Unless you hit a lottery, you can never be rich in your life. You will always be struggling with your finances. If you wish to avoid this financial struggle, you have to take control of the situation. You have to save money. Not just one month, every month and keep investing money such that it gives you returns.

 The key ingredients in the recipe here is

  • You have to spend less than what you earn.
  • Keep working towards increasing the gap between your income and your expenses.
  • This gap, you need to invest such that your money works harder for you to generate more money.
  • Repeat above steps month on month – year on year for as many years you can
  • One of the most important tip – Do not fall in DEBT trap

This is what is required to be wealthy. There is no magic to become wealthy. You have to change your mindset; the money you earn is not for spending in entirety. Once you master this, you are on right track. If you have control on your spending, you have control on your money and on your future finances.

There is only one magical formula “You have to spend less than you earn”

One you achieve this, you need to focus on investing the amount you save each month. It’s not just about investing – its about investing wisely to maximize your returns. Keep on repeating this for donkey years; – you will end up as a rich guy/girl.

Only thing you should focus is consistency in investing money. Yes, I repeat consistency in your approach of investing. Just like you earn a monthly salary – pay your investment kitty also a monthly salary. This amount you invest every month will keep on increasing your net worth.

“Money is not everything in this world, BUT money gives you a cushion which is a mean to survive in this world. ”

Money instill a kind of confidence in your life to take on life’s challenges.

Consumer Debt & personal finance

Malls are filled with loads of white goods showrooms. Not only they have latest models of TV (LED, 3d, HD ), refrigerators,  kitchenware, washers, dryers, food processors, microwave ovens, cutlery, music systems but also they buyers lined up to buy them. Hardly anyone buys all cash. Most of them lined up to buy stuff are through consumer credit.

 

consumer debt & wealth

 

One of the greatest hurdles in creating a positive net worth is consumer debt. With easy credit availability, everything in the market is available at easy EMI (equated monthly installments – monthly payments). This is luring consumers to buy anything and everything they want.

  • Our neighbor has bought a new 85 inches LED, so we must also get something similar, if not bigger.
  • I must have a new car to show off my status; after all I am working so hard.
  • I must go to Malaysia / Singapore trip this winter holidays as my neighbor had done this last season and they boast it a lot.
  • That Tissot watch is so tempting; I must have it alongside my Seiko to go well with my casual dressing.

The list is ENDLESS

Above are the lame excuses we make to ourselves to get into consumer debt. Since today’s generation is earning well, and coupled with easy credit availability, everything seems to be within reach. EMIs make us think that we can afford anything, but in reality, by increasing EMI burden, we are harming our savings and investments in the long run. What if a bad economy patch hits us, times are not always going to be on your side. Suppose you are out of job for few months due to a sudden slowdown in economy, how you are going to manage so called EMIs?

Consumer debt is like a black hole. Once we get sucked in it, it is impossible to get out of it. We get more and more tempted by LOW EMIs or low monthly payments. We are then not bothered about the percentage of our take home that is going out in terms of monthly payments towards these loans. Once we add up the processing fees, interest charged on the loan, the final costs escalates and this makes our purchase financially not feasible by the time the loan term ends.

We see TV’s , print media, online media all tempting us to buy something or other. We tend to flow with the marketing pitches and buy the items which are in WANT category. Sometime we ignore our basic NEED category and give preference to WANTS. These WANTS will not serve any good to you in the long run as they are negating your savings and investment potential. Remember in later years, these things are not going to support you. You need funds in terms of retirement savings to take care of you.

Avoid consumer debt like plague; invest money smartly for your retirement years. Ultimately you are the decision maker of your life and you have to make sure that these little EMIs do not end up denting your retirement savings.

There are some good credits and some bad credits. You need to wisely distinguish between them. Good credits increases your net worth in terms of appreciation of the item purchased and also they give you tax breaks. Home loan or mortgage is an example of good credit.

Consumer loans come under bad credit. You buy the stuff which loses its value considerably the moment it comes out of the showroom. Also, you pay interest, processing fees and you do not get any tax break on this purchase. It’s your choice now, what kind of loan you should pick for your financial independence.

Have you bought anything recently on easy credit?

What is an emergency fund? And why you should have one?

In personal finance and money management, emergency fund is the first line of defense against the unexpected problems in life. Financial emergencies can happen anytime, and most of the time they occur without warning.

  • What if your car needs immediate repair?
  • What if you are out of job for a couple of months?
  • What if you broke your leg while playing gully cricket?
  • What if a sudden voltage surge damaged your TV/Fridge/AC and all devices?
  • How you are going to tackle this?

Times are good, you can draw money on your credit card, or you can swipe your card to get new TV/New AC etc. You can take personal loans to pay for the home expenses if you are not in job for a couple of months. But all these options come at a cost. Cost is 18%-24% rate of interest per year.

So, you must have an emergency fund, which is money stashed away in an account which is reachable at a short notice of about 1 working day. Now the question is How Much? There is no thumb rule to it. 3 months of living expenses should be sufficient so that in worst case you do not have to rush out and get money on credit.

You can use a high interest sweep in account of any bank or a liquid / cash mutual fund. Mutual fund option is better as it saves you from the high tax if you are in higher tax bracket. Any liquid mutual funds can be cashed in 1 working day. You do not have to plan to earn huge interest on your emergency fund, but let it sit in some avenue which gives some returns and which is easily accessible.

Power of Compounding

The Magical power of compounding

Albert Einstein is purported to have once remarked that the most powerful force in the universe is compound interest.

In simple terms, compounding is the financial equivalent of a snowball, rolling down the hill and gathering momentum as well as weight. More the ball rolls down, more weight it gathers in terms of the snow that get attached to it and more its momentum increases. By the time it reaches down the hill, it can well translate into a small avalanche. More the distance of travel, more is the impact of snowball.

Almost all personal finance websites/blogs and all financial magazines emphasize on power of compounding. If you start early, use compounding effectively, the end result could be a huge avalanche of money. The key is to start early and remain into the game.

I am not going to give chart of person A starting early and person B starting at later stage in life and the potential gain for person A over person B. But if you start early in life, it makes a HUGE difference.

Same is applicable to the money that you spend on material gains or for momentary gains. If you put the figures in any of the online compound interest calculator available for the money you spend in leisurely sipping cups of tea / enjoying junk food day by day, month on month, you will be astonished to know the amount of money you stand to lose over the years. The loss is two ways, one in terms of actual money you spend and other is the health you stand to lose by gulping junk food.

So gear up and use compounding as an efficient tool to maximize your gains in investments.

A penny saved is more than a penny earned

“A penny saved is a penny earned”

Most of us would have heard this popular saying. In reality, it is different. Is goes like this

“A penny saved is more than a penny earned”. Yes it is more, much more than you think. There are different angles to it.

If you see from taxation point of view, the penny saved is after tax deduction. That means you have already paid the tax on the saved penny. When you earn a penny, you have to pay tax. And for the highest tax bracket, its 33% tax, so when you earn one penny, you end up having only 0.67 penny at your disposal.

If you see from Work angle, you have already put in effort to earn the saved penny. You had worked x amount of time and put in your energy and earned the saved penny. To earn a penny again you have to put x amount of time, energy and resources in terms of fuel etc for commuting.

Hence you are much better off when you save a penny. Save it and invest it so that you can multiply it for your future needs.

Framework to bring finances under control

Taking control of your financial life is not very complicated, nothing like rocket science. The basic principals are simple, easy to practice if you can co-relate them with your day to day life and the expenses you incur.

  • Get a good education, work towards building your career
  • Spend less than you earn – This is the most important part
  • Track & budget your expenses – Any given point of time, you should know where you are financially
  • Invest diligently rather religiously every month towards your goals
  • Plan for taxes; take informed decisions on your regular taxes and taxes on your investments. Optimize them so that you do not end up paying a lot to the government
  • Keep enhancing knowledge to manage investments, budget and taxes. Remember, it’s your money and none else will help you in planning for your goals unless they have vested interests

The above 6 points sums up the key to financial success. And remember, there is no place for debt which can spoil any good retirement plan. Especially the debt meant for buying lifestyle goods. You need to beat inflation as well as lifestyle inflation to beat the financial blues

Your money is your money!

As title says, “your money is your money“. None other than you would be able to manage it better. Others, who claim they can manage better, have their conflict of interest since they would be doing it for their livelihood. When they earn commissions for suggesting you the investment tools, they can never be honest with you. Here I am talking about the insurance agents, investment advisers and host of bank officials who always push you with some “REAL GOOD” plans

I am not pointing fingers at the financial planners, but at times, they cannot be believed due to conflict of interest clause. Their “BEST PLAN” might be the “BEST PLAN” for themselves but may not suit your needs.

A common man, who is working his way up in his career, is an educated person. He has basic knowledge of this world, how to live, survive, commute, plan things. Why not take charge of the finances instead of outsourcing it to someone who is unlikely to give you honest advice. We as employee help our companies to grow by managing their balance sheets, why not help ourselves by managing our own balance sheet of household finances & investments?

So remember, your money is your money. If you outsource your money management to someone, he will be more interested in sucking the commissions out of you by suggesting funds/avenues which gives him better commissions instead of suggesting you honestly where to invest. So take charge, control your finances. And believe me, with little knowledge you can be easily at the driver seat.

You alone will be the best person to guide your investments which is ultimately going to lead you to a financially stable retired life.

Why Money is Important?

A popular advert for a leading credit card company says “There are some things money can’t buy, for others there is MXXXXXCard”

Philosophically it can be said that money is not the most important thing in this world, but the fact is that without money, none can survive. We need money to buy food, buy a roof at our head, buy services to sustain our life/lifestyle and above all it gives us a kind of security.

  • When you are a student, you need money to fund education
  • When you start working, you need money to buy basic necessities
  • When you are married, and have family, you need money to build wealth and buy comforts
  • When you are sick, you need money for the healthcare
  • When you retire from work, you need money to sustain your lifestyle and fund expenses
  • When you are dead, you need money for your last rites

 

Money is required for every single stage of your life. We live in a world that thrives on Money. We don’t see this trend passing / changing anytime soon. The best thing is to use money as a tool, a mere tool so attain happiness. Not in terms of buying all luxuries available out there but to make wise decisions to have happiness and spread happiness in life of people who are connected with us.

Money is important but it’s also JUST money. Of course we should study hard, work hard to earn money but at the same time we must not lose our sleep over money. We should strive for a balanced life where you stop and smell the roses at will.
Wealthsamurai is about living life being lively, not about running around scouring for money all the time. We must focus on living a quality life instead of measuring our life by quantity of stuff we buy

Money & Life stages

From one’s point of view, there can be different stages in life with respect to money. Remember, this is only perspective – in general for a common man.

As one goes through different stages in life, the financial condition & goals are likely to change. They cannot stay constant over the entire life span. What holds good for you at early employment stage may not hold true when you are at the peak of your career. What is good for you at the peak, will likely change when you retire. If you manage your money well, you can strike a balance in all these years and can have a good plan for the years to come.

Stage 1:
Initial career years
From an Indian context, most of the parents pay for the kid’s education till University stage. So the first stage I am taking is early career years. The immediate goals for this stage may include buying a vehicle (a car or a two wheeler), planning for home, home furnishing, building a good credit history. However this might change soon as kids have started moving out on own soon and since education has become quite expensive, education loan is gradually become a trend now.
There is lot of energy and dreams at this stage. This stage decides how you will shape up your life, hence decisions taken are important and have long term impact on your life.

 

Stage 2:
Starting a family and career building
 One may switch jobs for earning higher compensation to increase financial kitty, growing savings, buying home, start to plan for retirement funds, start a family, begin saving for kids education, buying adequate insurance etc Income typically rises in these years.
The right investment decisions taken at this stage leaves a long lasting impact on your life. Also since these are initial years, money accumulated and invested wisely comes handy at a later date.

 

Stage 3:
Pre-Retirement years
Your expenses more or less stabilize now due to high income. Kid’s higher education, their marriage , prepayment of home loan, any other long term loan prepayment, putting away more funds for retirement, taking professional help for financial planning/ retirement planning. At this stage you become more organized for retirement planning.

 

Stage 4:
Early retirement years
You are officially retired, but you may want to work for sometime more as you are in good health. This is just to support the lifestyle, travel. You now work towards consolidating the retirement savings into a regular monthly income, managing taxes, and do everything in making your savings last till you breathe last. Preparing will also come during these years.

 

Stage 5:
Twilight years
You may become less mobile due to age and health issues. The goals include planning for assisted living (trend is picking up in India now), tax optimization, efforts to make your money / savings outlive you. Prepare yourself for this stage well in advance when you are at stage 3 & stage 4. You can consult people who are undergoing stage 5 and plan well in advance.

To sum up, your goals will change with each stage and if you are well prepared mentally for each stage, you can plan well. A well planned, goal oriented life will put you in less stress financially and ultimately make you sail through your retirement years.

The ultimate retirement goal for anyone it to outlive his/her retirement fund.
If you plan well at different stages of your life, this goal is quite achievable.

~ WS