Before getting into anything, let me define “Getting a Handle on Your Money” for you & what it exactly means so that we know what we’re precisely trying to achieve here:
Ans: It is an emotion. It is a state of mind. A very positive & peaceful one. Getting a handle on money means, knowing with a high degree of confidence at the start of the month ( and at any point in time in your life) , as to what your income is, what your expenses are, where & how you spend & invest your money. It also includes having a view of how much money will be left with with you at the end of the month for a typical uneventful month & what you will do with it. However, as we know we seldom have uneventful months. Hence, having a handle on your money also includes having the ability to manage ( without the slightest panic) any events/surprises that the month or life may throw at you. Having a handle on your money means the ability to manage any financial surprises, in a way that they don’t become a major life crisis , adversity, obstacle or a setback to be dealt with in life, but rather become very small temporary inconveniences. That’s it. Imagine this zen state of personal Finance. This is what we’re tryin to get at .
Now, about how to attain this state of mind. Will be covering over a few parts & various aspects. This blog entry is part 1.
Contrary to what you believe, getting a handle on your money is not a tedious & time-consuming job. Moreover, when you do it once, then the second time & then the third, you pretty much spend 5-10 mins every month to set up the month. I’ll tell you precisely how. Later, we can also automate the process.
Let’s talk about Expenses first.
Like most things in life, here too, if you only chase perfection you’ll never end up planning your finances. By Perfection in planning finances ( understanding expenses) , I mean the advice you usually hear from most financial gurus on keeping an expenses diary, noting down every expense, counting your coffees & what have you. Sure, that’s a meticulous way of doing it. But how many of us actually end up doing it ? or drop it 2-3-5 days into the process. You don’t need to do this painful process!! Definitely not, to get a simple handle on your money. You are not trying to launch a satellite here. Don’t make it complicated.
A much simpler way to go about it is to wake up early morning on a weekend ( or find quiet time late at night if you prefer), open an excel sheet ( preferably so you can save for records) and start listing down the expenses that you typically end up paying for in a month. This does NOT need to include ad hoc/small expenses.. This may not include expenses which you may not have amounts handy ( for example : Groceries, Petrol etc… That can be easily managed ). We can get to that later.
Start off with the major ones like Homeloan EMI, Car/other EMIs, Rent , Salary of House helps, Electricity Bill, Cooking Fuel/Gas Bills, Any other Major Monthly Fees ( school/others) , Society Maintenance etc.
Then come to the Daily consumption Bills ( For example, Newspaper, Milk, Laundry services etc.), DTH Bills, Netflix/similar subscriptions, Mobile Bill, Wifi, Fuel & Groceries( if you have a ballpark..if not, ignore) , Alcohol & Cigarettes ( if consumed).
The come any ongoing investments, SIPs , monthly premium payments etc.
There you have it ! It’s done. If you do the above exercise with focus & attention ( peace time either in the morning/night/whenever) you will get 80% visibility on what your inflow & outflow is.
Now, coming to the part about expenses you are unable to recollect. Let’ try. ( If this doesn’t work, I have another solution as well).. Let’s try this first.
Make a list of expenses you may/may not have a ballpark on. Things like Fuel, Groceries, Vegetables, Eating out, Coffee etc. /other small expenses.
Now just think for a second ( does not need to be exact) . How many times do you fill fuel in a week? And what’s the avg bill. Typically a full tank of Petrol /Diesel for a car would cost INR 2500-3500. Try to get some ballpark for your mode of transport. Similarly try to get some ballpark for Fruits, Veggies, Groceries. Try to recollect the weekly expenses then extrapolate for the month. Try to remember how a typical week goes by & then multiply it by 4.
Similarly for eating out/ordering in. Do this. What if I asked you to order a meal for yourself/family right now , in this moment ? Where & What would you most likely order from ( We all have our usual go to /favourite restaurants we don’t mind repeating) ? What’s the last approx bill amount you recollect from one of the recent typical orders? There it is.. Now how many times in a week do you order/eat out? Multiply it by 4. There it is! Simple. No pocket diary & expenses noting needed.
By now you’ll have 80% visibility of your expenses with almost 80-90% accuracy. This is very good to actually move on to the next step of financial planning.( more, in the coming blog posts)
Now, coming to the part if you are absolutely not able to get ballparks on small/medium ticket spends through processes listed above, use this trick. Divide your mode of spending across areas you need to get visibility on & stick to that mode for those areas. For example, say you need to figure out how much you spend on groceries & Fuel.. Decide then, that all grocery & fuel expenses will be swiped on a particular debit/credit card through a particular account. For fruits & vegetables for example ( since most vendors use cash) , at the start of the month keep a specific amount of cash in an envelope & label it with the amount. Spend for fruits & veggies only from that envelope. Amount left at the end of the month will give you the exact amount spent on fruits & veggies. No Need to list & note every expense.
On performing the above steps as per requirement, you will have visibility of over 90% of your expenses with more than 90% accuracy, without having to perform the tedious exercise of noting down every expense in a diary/app etc, which can be a challenge for most.
I am attaching a sheet here which has some sections & expenses listed for reference. You can build on this. (Click here: Handle on Finances )
There you have it! With this exercise, you will definitely have a good handle on your EXPENSES. For getting a handle on your overall Finances, the discussion continues in the next part!
If you don’t know your expenses, you will never ever able to plan your financials & you will always keep struggling for stability when it comes to your finances. So do this exercise. Get a view on your expenses as step 1!
Oh, I forgot. The “WHY” of getting a handle on your money? Ans: Why not? Why wouldn’t you want to have a complete handle on your money? It is Your Money. You worked hard to get it in your kitty in the first place. It’s your duty to develop the ability to control it the way you want & to make it to work for you, so that it can support you in the right way, in the right place & at the right time. Hence, crucial to have a handle on your money!
Dad So Kool