Six Rules of Money Management

Saving money is more important than earning it. One needs to follow few simple rules of money management in order to manage his personal finance and fulfill his dreams. Whatever be level of income, if one follows a disciplined approach, he or she can definitely achieve their financial goals. My experience with personal finance has taught me these rules. These are not magic but very basic “Six Rules of Money Management” and I can bet anyone can follow it.

Rule I - Plan Your Goals Properly

You should be aware of your goals you want to achieve. Goals should be realistic and only you can set them. Examples include buying a house in next 5 years. Once you know your goal, you can estimate the cost of achieving that goal. When I say cost, it should be inflation adjusted. Buying a house might cost Rs. 10 lacs today, but after 5 years it might cost Rs.12.77 lacs even if I assume a simple inflation rate of 5% p.a. Now you know that you will need 12.77 lacs at the end of 5 year to buy a house. Unless and until you are aware of what you want, you will be lost in rat race of making money without knowing how much you want to make.

Rule II - Budget Your Expenses

Plan your expenses in advance. Sit down and note down all your monthly expenses. Include even the smallest of expense. This will help you to know your monthly expense budget. No need to say, this should not exceed your income level. There will be three components of your monthly expense budget. First, will include those expenses which recur every month and cannot be avoided. They can include house rent, groceries, telephone bills etc. Second, will include expenses of non-recurring nature e.g. shopping, clothes etc. The third component will be the contingency component. Always keep aside 10% of your income for unseen contingency e.g. medical expenses. Once you know your level of monthly expense, it will be very easy for you to calculate how much you can save each month comfortably. This is the magic figure. Believe me this savings will do all the magic. Suppose you calculated that you can easily save 20% of your income every month. Now, no matter whatever happens, you will not divert from keeping this 20% aside.

Rule III - Invest Regularly – “Pay Yourself First”

You need to invest regularly to achieve your goals. I stress on the importance of word “regularly”. This is very important and this should become a habit. As soon as you get your income, pay yourself. I mean “Pay yourself before paying anyone else”. So suppose your monthly income is Rs.25,000 then invest 20% i.e. Rs.5,000 for yourself and then pay your expenses out of the balance. This might look very simple but sometimes this is very hard to follow. Once you are in a habit of following this rule strictly, no one can stop you from achieving your financial goals.

Rule IV - Invest Wisely

Idle money lying in a savings account might be the safest thing to do but not the wisest investment option. Look around for the investment options available around you. Invest your savings in a decent investment option. The horizon of selected investment option should be in line with your financial goal. So if you are saving for your house, then choose an investment option for 5 years. The return from selected investment option should be able to beat the inflation rate. Select an investment option based on your risk profile. Don’t be lured by high returns that can be achieved by investing in risky asset class like equity, unless you are sure that you can bear the volatility of equity markets.

Rule V - Don’t be lured by Easy Money

Today is the world of credit and debt. Most of us are living on debt. Easy availability of money will make every attempt to put you in a “Debt trap”. There is every possibility that you get phone calls from banks to take credit cards or personal loans. In today’s low interest rate scenario you might jump out of your chair to grab them. Beware! You are falling in a trap. Once you take a loan or credit card, you are creating a hole in your pocket in the form of interest payments. Every month a portion of income will go in paying interest on these loans and you will end up reducing the 20% savings buffer that you had created for yourself. This mistake alone will be enough to dismantle your plans of achieving your financial goals that you had set for yourself. So think again, and don’t fall into this trap. Whenever I get any such calls, the first thing I do is that I end up call without saying anything. Because, some of them will be very good sales person and will end up selling you the products irrespective of your resistance.

Rule VI - Follow these Rules Strictly

The last, but not the least, rule is to “Follow these rules strictly”.