Money Management

There are many principles for Saving and Investment. They teach about how to earn and save. They analyse how to divide our expenses and make our investment more profitable. If we get hold of those tricks, money management is very simple. Few principles of money management.

FISH formula

F = Fixed expenses every month

I = Investing for long term

S = Short term savings

H = Happy to spend.

Whenever you get the message from Bank regarding your salary credit, you must divide your salary into 4 parts.

First part

Fixed Expenses = House rent, Internet Bill, Mobile bill, Milk bill, Groceries, Vegetables, Maid, Petrol, Gas, DTH, School Fees, etc.

Estimate the total fixed expenses approximately and add a 10% buffer as there will be some expenses which can exceed in some categories. But with one condition - Ensure that the total expenses including buffer should not exceed fifty percent of monthly salary.

Second Part

Investing for the long term = Buying a House, Retirement Plan, Children education, etc.

Can consider 15% of salary. Consult a financial expert for investing this amount which generates good returns in long term.

Third Part

Short Term Savings = Buying car, International trip in summer, repairs to the old house, etc.  which are large financial requirements which you forsee within the next 5 years.

Can consider 15% of Salary. Consult a financial expert to help plan for saving this amount so that it can beat the inflation.

Fourth Part

The remaining 20% is all yours to spend. Spend this for your happiness and hobbies like going to theatres, short trips, pizzas for children, apparel shopping. This amount can be transferred to a secondary savings bank account and spend from this account.

Once the FISH principle is agreed, we can reduce half the burden.

In case of increments and promotions, you can increase your investment for long term accordingly. Increasing your investments on an yearly basis would go a long way than maintaining a constant amount every year.

5-5-R Framework

Life is unexpected. We should be ready to face any challenges. As part of Financial planning, we should have the following - Emergency Fund, Family Health Insurance, Life Term Insurance for the breadwinner. We can use the 15% Short term savings of the FISH principle and modify it to '5-5-R' framework.

First 5% - Emergency Fund. Should be equal to one year income. We should set aside 5% every month till we achieve the Emergency fund. Later, we can divert the 5% to short term savings.

Second 5% - Health and Life Insurance Premiums.

R - Remaining into the Short term Savings.

One Condition here. Don't expect huge returns from Emergency Fund. We should be able to get money within 24 hrs in case of any adverseries. While taking Health Insurances and Life Insurances, please take care of Claim Rates, Settlement History and policy exclusions. Don't hide anything in health declarations. Premiums may increase, but we can expect immediate medical assistance when required.

50-40-10 Technique

We might receive large sum of money - company declaring unusual Bonus, selling off an inherited land, and can get confused on how to deal with such huge amount. We can use 50-40-10 technique in such case.

50% - Spend to fulfil your dreams - clear off any loans, buy in real estate (if amount is huge). Focus on your comfort and such spending should be a huge relief.

40% - Long Term Investments

10% - Short Term Savings

How much to allocate in Equity Market? 

100 - Current age.

As you grow older, your asset allocation needs to move from equity funds toward debt funds and fixed-income investments. Suppose your current age is 35 years. Your portfolio may have 65% of equity-oriented investments and the remaining 35% among debt funds and fixed-income securities.

We are earning to live happily. Saving-Investment-Happiness should be given equal priority. It's not enjoying after earning, we should be enjoying while earning.

7-5-3-1 Rule

We shouldn't take any hasty decisions at any stage of life. We shouldn't withdraw the funds for small needs or fear of losses. In such cases, follow this rule.

As a professional investor, we should constantly keep track of Stock market. But in case of job holders, this might not be possible. In this case, Systematic Investment Plan (SIP) is the best method to invest in Stock Market. We should follow certain financial rules here. If we analyse the Market trends over the last 25 years:

- Investing in SIP for less than 1 year has more inclination towards losses (Around 24%)

- Investing for 3 years also has failure rate of 10%

- Investing for 5 years is good but returns might be on the lower side of about 6-7%.

- Investing for 7 years is the best and fear of loss is also lower. The returns can be more than 7% for 96% of the period. Returns of more than 10% also possible in 79% of the period.

Emotions

1. Disappointment - Returns are only between 7-10% but expected more.

2. Frustration - Sometimes market might go down allowing to think that FDs give better returns than equity markets.

3. Pain - Sometimes market might fall steeply causing to think that we dont want returns and happy if we could get our invested amount.

Every investor goes through these 3 stages. We should stand firm during those critical times. We should avoid unwanted fears and become financial winners and gather wealth.

Art of Spending

Expenses are inevitable. However we try to be careful, we may face unforseen expenses. We should track those expenses - how and where it is going. But do not go on cutting down expenses. We should be able to spend on our desires by staying within our budget - like a foodie going to a restaurant monthly, a fitness person taking gym membership, etc. Don't go for luxurious things but for quality life. 

Enemies of Wealth Creation

- Buying house is good decision. But shouldn't go beyond our abilities. Focus on wealth creation and then think of owning a home

- EMIs don't allow a person to sleep peacefully. Buy luxurious stuff with Money only and when you have money and not with a Credit Card.

- Don't mix Investment with Insurance. 

- Don't take risk more than you can take even if it gives superior wealth.

- Don't be a guarantee to something beyond your capacity.