We work hard to earn money to better our lives every single day. But how do we treat this hard-earned money? Do we manage it ourselves? I don’t think so. We all should manage our own money. Here’s why.
‘Manage your own money‘ – A good topic that was highlighted by one of our readers Mr. Jay Upadhyaya, in the comments section of the article discussing ‘why your gold investment could be a dead asset’. The comment can be found here. A small comment actually aroused a bigger question. Why do we not allow ourselves to manage our own money? We are too dependent on CNBC, Zee Business, ET and the likes to actually decide what to do with our money. We rely on some fund manager who we have never met or who has no clue of what your financial requirements are. Don’t get me wrong, I am not saying it is a bad thing to follow these business channels or let the experts handle our money. The bad thing is to follow their advice blindly or let fund managers handle the way you view your investments.
Experts have the knowledge and resources to handle their own money. They never tell you how they managed their money. They will only tell a generic guideline or an estimate of a particular investment class would grow by ‘X’ amount in the next 6 months so people can contemplate to invest in that. They DO NOT tell you to DO IT. They ONLY suggest. But we take it the other way round and follow their words to the T. Also we often invest in plans that a ‘Relationship Manager’ suggested would be good for us and their sales pitch makes us invest in the instrument even when we do not understand it. Don’t tell me it has never happened to you. It happens to the best. To avoid this, one should manage your own money.
Rich people manage their money well. Poor people mismanage their money well.”
– T. Harv Eker.
So manage your money and manage it well. Let us understand how you can do it and the benefits.
1. Sort out your income and expenditure:
Firstly sort out your finances. Make a note of your monthly outgoings for 3 months and then get an average amount of your monthly expenses. This includes your EMI if any as well as household expenses and bills, fees etc. This should be your monthly expense that you need every month. After this if you feel you cannot save much, then cut down on your unnecessary expenses and try to increase your savings.
You know what you are worth and how much you actually need. It also serves as an incentive to look for ways to improve your income or save more.
2. Set some financial goal:
Keep a financial goal for yourself. How much money you need? For ‘what expense?’, In the next ‘how many years?’. For example if your goal is to have Rs. 2 Lac to buy a car in the next 2 years, work towards saving this money. Similarly keep some long-term goals like children’s education, buying a house etc and see how much will you need in what time. This way you will have a clear picture of how much money you need. Remember you don’t need this money now. You need to only work towards achieving it. Buckle up and save better.
Goal setting also gives you a clear picture of what kind of investments you will need – equity or debt. For example if you need Rs. 15 Lac in next 15 years for your child’s education and you can spare Rs. 7000 in a month, then you can invest in any investment that gives you around 10% returns p.a. and most secured investment should suffice, if you need more returns then you know that equity will have to be opted for in the form of mutual funds. Hence goals help you be clear and confident towards being able to identify your investment needs and manage your own money.
You are able to sort out your needs and classify them according to time, rather than just saying I need this, I need that without knowing when and what to do to get it.
3. Make separate accounts for savings and expenditure:
Make a budget based on your average monthly expenses from step 1 above and keep aside the extra in way of savings at the beginning of the month and not the end. This way you have a fixed amount to spend. Anyway, this savings account is where all your monthly investments will go out from. Like for instance the Rs. 7000 you need from the above example should be going from this account. All the returns you earn should also be deposited to this very account only. This will be the account that will be your investment account and you know where to look for when you want to see how much outflow is towards which investment. The bank statement will reflect exactly that, thus making it simple and easy for you to manage your own investments.
You can get a clear picture of your expenses and savings separately. Also you do not ‘accidentally’ withdraw more and eat up your savings, as all withdrawals should be made from the account allocated for expenses only.
4. Make allocations from within the savings account:
Now that your savings account is sorted out, after a year of so, if some of your investment has given you good returns, you can either re-invest that into some other fund or allocate some reward for yourself. This reward however should not be a monthly practice. Quarterly is OK, Half yearly is good, and yearly is best. It can be a holiday you needed, ‘that’ thing you ‘needed’ to buy etc.
You may be able to sleep better knowing that your savings and investments are going to be well managed in the long run, as you are allocating it regularly every month. This also serves as an incentive to save more and stick to your investment habit, as you can see your money grow first hand.
5. Identify the type of investments you are comfortable with:
Once your goals are set, and you know how much you can save and invest; you would know how much returns you will need for achieving those goals or financial needs. If you need 9-12% returns, you can get it by FD, Company FD, Government Bonds, FMP etc. You can get details on them here. However, if you need over 12% and close to 15-16% p.a. to meet your goals, then you have to opt for equity. If you cannot fathom the rise and fall of the stock markets, opt for Mutual Funds. But research about them yourself. Ask questions and don’t just let your financial advisor or fund’s relationship manager tell you what you should invest in. Check past performance, especially during times when markets were falling. This will give you a good idea of the returns for the fund you are investing in.
You are more involved with your own money. This way you also understand the financial planning and management better.
6. Understand and only then invest:
The other important factor for managing your own money is to understand what you are investing in. Just because you wanted to invest in mutual fund, you invested after researching its returns. But do you know what a mutual fund is? Will you understand the account statement when it states the Units Allotted, NAVs, Current Fund Value etc? If the answer is NO, then research. Use the internet to your advantage and understand what kind of investment it is in which you have invested. Be it anything Mutual Fund, FD, PPF, GOLD ETF, Recurring Deposits, etc. This also applies to all types of Insurance covers you have, Life Insurance, Mediclaim etc. Take time to understand the policies and its terms and conditions and only then sign the form.
You won’t fall for “hard sales talks” to make “expensive investments” like ULIP over a simple Term Plan or some fancy plan over an SIP in diversified Mutual Fund investment.
7. Keep a track of your bank accounts and investments:
Once you have gone through the ‘savings–>goals–>understanding investments–>choosing the right investment option–>approaching the relevant person or organization to complete the investment formalities’; now is the time to keep a check on your money. This does not mean that you check it every day though. Check your investment portfolio every 3 months. This includes the amount in your savings bank account, your investment instruments you have chosen, and the returns it has given. In case the returns are not what you expected, firstly check if it is the case with only your investments or with all other investments because there is a general downward trend. If it is generic then worry not as things will correct themselves, if it is just your particular investment, then you need to review it. Ask questions to your financial advisor or relationship manager and if needed change the investment type.
In case of bank accounts, make sure there are no wrong charges deducted by the banks; also ensure all transactions via your debit or credit card or withdrawals via ATM are reflected correctly. If there is any transaction you are unsure of, report if to the bank immediately.
You understand which investment worked for you and which did not. You can be safe from frauds and you can put things in order before it is too late in case some investment is just not working or there was some suspicious activity in your account.
8. File Taxes the right way:
This is also the most neglected aspect of managing your money. So often I have seen people giving only partial information about their income while filling taxes. They do not reveal certain bank accounts, or do not bother to give any bank details at all. So many people merely give their FORM 16 or FORM 16A to their CAs and even the CAs promptly file their returns based on only this one document. This is a wrong practice and can get you into trouble with the Tax authorities as well as keep you completely unaware of what actually is tax free and how you can save tax, by investing correctly. Please provide all your bank accounts and investment details for filling your taxes.
This way you will look for legitimate ways to save your taxes and learn more about tax-saving investment options. This will only boost your investment and savings habit. Also you will be fully aware of your tax position.
Take help of investment routes like Mutual Funds, Insurance, Equity, Fixed Deposits, PPF etc. But Do it yourself. Take active participation in putting your money in these investment avenues. Select an investment only after you research on them, even if it means asking 10 people. Know the expenses like entry loads, exit loads, service taxes, penalty, maturity values, and tax implications of all your investments yourself and don’t rely on what your advisor or the relationship manager told you. Manage your own money, you worked hard for it, so don’t abandon it.