Personal Finance


Changing your money equation for a better financial life

28 May, 2014

It's a rarity to find two women discussing financial matters, so when a friend of mine and me got into an animated discussion about spending and saving habits, it was a first for us. Although for me, work demands that I talk to people about their finances and financial affairs, for my friend it was the first serious conversation about money. We had never done it before and in hindsight, she is very happy that it happened.

Priya, my friend, has a problem she doesn't seem to be able to crack. She’s single, earns well and lives life on her own terms. Despite slogging it out for a couple of years, all she had managed to accumulate were some tax saving investments, couple of insurance policies and her employee provident fund. She was frustrated that people at her income levels have purchased a home but she is nowhere close to doing that. She just doesn't seem to know where her money goes.

I prodded Priya to share with me the typical sequence of events during the month after she receives her pay check. She said that she needs to pay the rent for her apartment, send some money home, pay her utilities such as maid, cook, car wash guy, electricity bills and the like. She also needs to incur some expenses on day to day running of the household. After doing all this, she is left with about 30% of her salary. I asked her what happens to the 30%. She confessed that she keep it in the savings account. I asked her if she manages to retain that money until her next paycheck to which I got a sheepish smile, which said it all. Priya is very fond of shopping and is too brand conscious for her own good. The good thing is that she does not run balances on her credit cards, but spends everything she earns.

This is a rather typical problem with lot of youngsters today. The fact that they earn well and there are temptations galore, saving for future always takes a back seat. I promised Priya that in 2 years time, she would be in her own house if she follows a simple equation. Her face lit up as if I was going to give her some magic mantra. I explained to her that her problem was that she tried to save what was left after spending. And in her case, nothing was left because the moment she saw money in her account, the designer dress she had been eyeing became affordable. Her money equation was ‘Income – Expenses = Savings”.
I asked her to reverse the equation to ‘Income – Savings = Expenses”. I told her that 30% of her salary at the beginning of every month would move out of her account into suitable investments, without her intervention. That money is unavailable to her for her spending and she has to make good with whatever is left. She agreed and we got started with the objective of building a corpus for down payment for purchase of a house. 6 months have passed and Priya is thrilled to see some serious money accumulated. She often does get tempted, but I remind her of her goal for this money and she gets back on track. She already tells me that once she has a house, she will start a similar exercise for another goal. 

Although spending is addictive, savings can also be addictive. You just need to try it. Once you start seeing all that money you have managed to set aside, the content and happiness is definitely more than what you get by spending.

So, what is your money equation?

Neeti Sethi, ACA, CFPCM is a Partner at Acumoney Consulting LLP and heads the Financial Planning and Investment Advisory vertical.

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