Well, today is the PAYDAY and you are very excited to see all the money in your account! You feel like you have all the money you need to enjoy the life. You plan that fancy weekend getaway with friends, you do not think twice to say yes for that Friday evening pub party, you get your food orders delivered in less than 10 minutes and so the fun continues. Today is 10th of the month and all of the sudden you realize that are already down to last few pennies in your account!!
Obviously, no one wants to be in this situation, but the sad reality is that most of us find in exactly the same situation month after month. Now the question is that is there a way to not get into this situation ever again, and the answer is an obvious yes!
Just like a proper planning and discipline to execute the plan is needed to overcome any obstacle in life, the financial issue is not different than that. You just need a practical working plan and little bit of discipline to follow the plan and in no time, you will find yourself in a much better position that you are now.
In this episode of personal finance, I will walk you through the step-by-step process on how to plan for the current month, how to track the progress of your plan execution and how to keep enhancing the plan to better suite improved situations.
Here is what you want to do at the start of every month and before spending a single penny from your current month’s salary.
Step 1: Roughly divide your monthly expenditure in five categories
The idea is to start visualizing your month in terms on money and get a feel of where your money is going every month.
Refer this table to divide your monthly expenditure in these categories.
| Expense Category | Expense Category Description |
|---|---|
| Needs | In this category put all those expenses that you must do in order to survive. This includes expenses like EMI, Rent, Grocery, School Fee, Utility Bills, Mobile Bills, Transportation etc. |
| Wants | In this category of expense, you put those things which is not needed to survive for the month but something you want to do to enjoy the life. This includes expenses like Entertainment, Vacation, Wining and dining out, gifts and donations etc. |
| Save | This amount is kept for future utilization such as any urgent situations. Here urgent does not mean that your friend calls and urges you to urgently go on a trip. Here urgent means all those unforeseen circumstances which compels you to spend money in order to survive. |
| Invest | This amount is used to investment purposes like Mutual Funds, FDs, PPFs, Stocks etc. |
| Miscellaneous | This amount is for all other types of expenses which you are unable to recall and categories. For example, you are driving back to home from office, and you feel like taking a glass of juice on the way. |
You can use the below excel sheet reference to categories your expenses:
You can download the working excel sheet from here: sheet link
Step 2: Track Your Expenses
This is the most critical step in the plan. Once you have visualized your monthly expenses, now is the time to act on the same.
You need a way to know if you have already done transaction for a planned expense or not and how much balance is left out in your account. There are various budgeting applications that can help you do the same but as you know nothing good come free of cost and if they do then there are strings attached to it. Considering this, there is nothing better than doing this with your own hand utilizing the tools you already possess.
Below is an improved version of the expense planner cum tracker which helps you do the same. In this sheet if you have already done a transaction then you can just change the status from Pending to Done and the sheet will automatically reflect the left-out balance in your account. As an added bonus, the status text will be colored differently to tell you the status.
You can download the updated version of the tracker sheet from here: sheet link
Step 3: Adjust and Optimize Your Plan
After you are done with the step 1 and 2 above then I am very confident that you are already in a much better position that you were before. Now you know with good degree of accuracy about where your money is going.
Now it is time to start putting controls on your expense plan to steer your financial journey in the right direction. Here, the right direct could mean entirely different for different set of people but the key is to put conscious effort in your planning and execution to start moving in that direction. But the question is how to start doing this?
The answer is simple, start with the low hanging fruit first! Let me explain.
Taking above expense plan/tracker as an example, at first glance all the expenses look impossible to cut but how about those Miscellaneous one? To start optimizing your plan, first task is to demystify the expenses i.e. try to move them from miscellaneous category to exact category for which you spent the money. Put exact item names under the “Bills” column. This will immediately start to help you if you should continue spending money on those items or if you are better off without them.
From the above table, you can clearly see that once you are able to itemize the miscellaneous expenses it is giving you more information on where you can cut the expenses.
We hope this article is able to help you get started with your financial planning and start taking control of the same.
In the next episode of “Getting Hold of Your Personal Finance” we will dive deeper into wholistic view of your finance and consider other factors like emergency find planning, retirement planning, investments and loans.
Until then live longer and prosper!