igging Deeper with Moneycontrol: Freedom week – Make your money work for you

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A day ahead of India’s 71st Independence Day,  the Indian rupee hit 70 against the US dollar (USD) for the first time.

The rupee has been on a downward spiral throughout 2018; it started the year at 63.67, and fell over 8 percent this year against the dollar.

And the proceedings beg the question, what does an individual’s financial freedom really mean in a context where the value of money shifts according to economic and political vagaries.

But then, maybe, we can just focus on the micro-realities of our own spending and save patterns to earn some amount of financial independence because really, that is all we have any control over.

This is Rakesh and on our series of Independence Day podcasts here on Digging Deeper with Moneycontrol, we will focus on how with a few simple strategies, we can create little pockets of financial well-being and develop habits that set us free rather than tie us down.

Ekari Mtewa, a lesser-known social media personality who offers financial consultancy has stated something quite meaningful and we quote, “The first principle to financial freedom is to spend less than you earn, but never deprive yourself to have those good vehicles, make those lake trips provided you don’t fall in debts. You don’t need to be rich to be financially successful, provided you don’t worry when paying the bills and you have enough left in the bank.”

The key being, managing what you earn judiciously.

Self-made millionaire Chris Reining on his site offers similar advice, basically to underscore how you don’t always need to start big to make it big financially and small habits can create big positive changes in your bank balance.

One of the biggest budget wreckers, according to him is getting caught up in toxic cycles of socialising that drain resources. Like social drinking. He himself was at one point drowning personal inadequacies by using drinking and socialising as crutches and finally stumbled on a self-help regimen that helped him not just to put his life together but also his finances back in order.

Sort personal issues before dealing with money issues

Personal freedom translates into financial freedom and so Chris first addressed the social anxiety that was draining his finances by taking the initiative to greet everyone he met at work, on the street, in the gym.

Every positive habit leads to another one and so it happened with Chris.

Speaking of money matters, he understood along the way that just as we prefer short-term rewards over long terms ones by indulging in unhealthy habits, we also follow the same pattern with money. And spend it on habits and stuff we don’t need to short-circuit future rewards. so he simplifies how you can save a little bit even without being conscious of it.

Automate your savings

He suggests that we make arrangements to automatically send a percentage from our paycheck to our retirement account.

He also recommends that we invest  10 percent of what we earn or an amount even smaller. It doesn’t matter where we start but that we start somewhere.

Automating bill payments keeps a check on how the money in our bank account gets used. The money you save serves well on a day when you really want something that once seemed unaffordable like maybe a Birkin bag or a pair of Louboutins and you can indulge guiltlessly because really, what is life without a few healthy indulgences?

Realistic budgeting is the way forward

NYT’ s Tim Herrera, believes that diets and budgets have one important thing in common: The best one is the one you’ll stick with. And there it is again, the link between personal accountability and financial freedom. Like a good diet, budgeting your money means that you cut out excesses and stay with healthy essentials.

Says Tim and we quote, “There’s really no wrong way to make and maintain a budget as long as you’re tracking your spending versus your income. It’s a simple idea, but it’s one that can be difficult to pull off. Still, it’s an exercise in financial responsibility that you’ll benefit from no matter what your income is.” Unquote.

Budgeting, he says, can help us source where the financial leaks are and divert them to an emergency fund or a home down payment or retirement savings.

To begin with, he recommends, writing down every single expense every month, then breaking them down into two categories: fixed expenses (the things you must pay, like rent, bills and loan payments) and discretionary expenses (things you control, like food, entertainment, car-related expenses and clothes).

There is a simple rule of thumb here, says Tim and we quote, “50 percent of your post-tax income should go to those fixed expenses; 20 percent should go to long-term savings and the rest should go to your discretionary spending. The exact proportions will vary from person to person, but that general budget makeup is a good mix to aim for.” Unquote.

There are multiple apps to monitor budgets and expenses because for beginners, getting down to the basics with a pen and paper can be overwhelming.

How to make friends with your budget

Writer Laura Shin in a 2016 Forbes article, observed how classifying our expenses can be confusing considering the categories are too numerous to count — transportation, utilities, business, education, entertainment, financial expenses, food, gifts, and so on, plus all the subcategories within them.

And as she correctly says,  we don’t always spend the same amount per month in each category. We might need to spend some money on our electronics budget one month for a new smartphone purchase, but none the next month. A health budget may vary too from month to month.

The goal, however, is to stick to the overall goal of staying within one’s means and she also endorses the 50/20/30 guideline of budgeting that we have earlier shared with you with a little space for flexibility.

She offers a few more tips to befriend a saving regimen.

– Tally your necessary expenses, aiming to keep them under 50% of your take-home pay.

This bit of ground we have already covered but to this adds Laura, “After you’ve determined your monthly take-home, divide it by two. For most people, the number that you calculate is the upper limit of how much you should spend on all your “necessary” expenses. These include housing, transportation, groceries and utilities. If you don’t typically use a set amount for your groceries, allocate a reasonable amount now, a number that you can easily stick to.

If you can get the sum to be less than 50 percent, it leaves you more room for paying off debt, accumulating savings, or having more play money. In particular, because housing and transportation costs tend to be our largest expenses, if you can keep these low, you can keep the portion of your budget devoted to necessary expenses low overall. ”

– Aim to allocate 20 percent or more of your take-home pay to your financial priorities.

Laura’s second tip is to never lose sight of your big financial dreams and long-term priorities like paying off debt, saving for retirement, buying a house, taking a dream vacation, or starting a business. Says she, “If you’re paying off debt, make sure that this amount can at least cover your minimum debt payments, preferably more. If you don’t yet have emergency savings, start small by building a “curveball fund” which could cover any unexpected car repairs or health expenses. Then, contribute regularly to an emergency fund with the goal of saving at least three months’ worth of your necessary expenses.”

She repeats Tim’s advice on automating savings and even debt payments so that you are not required to manually transfer the money. Sub-accounts, are a good idea too for dividing your savings between an emergency fund, a trip, and the down payment on your house.

Like Tim, she also believes that starting small is better than not starting at all and says, “If you can’t imagine putting 20 percent of your budget toward savings or paying off debt, start with whatever percentage you can manage now, and then increase it by another percentage point or two at regular intervals as you find ways to cut costs or make more money. For instance, if you receive a 2 percent pay raise, continue living on the same amount, but increase the financial priorities section of your budget by two percentage points. If your necessary expenses are below 50 percent, such as 40 percent or 35 percent, you should more easily reach the 20 percent goal and even surpass it to, say, put 25 percent or more of your budget toward your financial priorities.”

One of her tips and one that needs constant repetition is that the top part of our budget, which is devoted to discretionary lifestyle expenses such as dining out, shopping, entertainment, charitable donations, gym memberships, electronics, etc., should be no more than 30 percent of our take-home pay.

She also recommends setting up weekly personal allowances that we can spend or save up for larger than normal purchases. And, if you ever go over your budget one week, you can then just cut your allowance for next week and vice versa, she advises.

Since financial needs are personal and unique to everyone, and if the 50/20/30 format doesn’t work for you, you can come up with a template that works for you. The point however is to stick to it.

Her final word on the matter? We quote, “However, once you’ve determined that you’re living within your means and automated your good financial behaviours, the only other ingredient you need to achieve your goals is time.”

Saving seems easy on paper but how do we cut corners in real life?

A CNBC article simplifies this matter of saving by offering a few insights into common spending habits because mindfulness is the key to abundance.

And a constant thread of continuity that runs through this podcast is that when we add up the small stuff, big shifts happen. As the article says, Little expenses, like a daily smoothie or a few cab rides a week, can add up.”

The article goes on to quote the man we opened the podcast with.

Chris Reining. He is quoted by CNBC and says, “I know there are some people out there that say you shouldn’t worry about the $5 latte, but the more I think about it, cutting out the $5 latte was a good place to start.” Unquote. After all,  starting small helped Chris work his way up to saving 54 percent of his income, which allowed him to retire at the age of 37.

It is not about downsizing massively because that will lead to a binge as happens often when we try to stick to unrealistic diets.

The article offers a few tips to cut back small but save big.

– Resist impulse buys

We live in a highly stimulating world where our smartphones, our social media scrolling habits to everything we see and register is packed with virtual and tactile spending triggers. So whether we are in a checkout aisle where cheap sodas, candies and little collectables beckon us or in a  mall packed with multiple sales or in a grocery store or shopping online, the tendency is to pick more stuff than we need. Don’t pick up that little something just because it is there and your pocket will be the happier for it.

– Cancel unused subscriptions

We quote from the CNBC story, ” How many 30-day free trials have you signed up for and forgotten to cancel? Are you getting your money’s worth from the gym membership you signed up for at the beginning of the year?

Look over your last couple of credit card statements and figure out exactly what you’re paying for in terms of magazines, video or music streaming services, meal subscription boxes or iCloud storage. Ask yourself which you could eliminate and cancel them on the spot to save.”

– Get your own lunch to work

As we get more distracted and busy, and food delivery services become accessible and convenient, it is tempting to order food at work every day. Add to this, the number of times, we dine out and the expenses add up quickly. We quote from the article, “The more food you can prepare at home, the better off your food budget will be. Of course, it’s OK to treat yourself and buy the occasional meal, but keep in mind that going homemade is one of the simplest ways to cut back without making dramatic sacrifices.

While you’re getting into the habit of packing your lunch, start filling up a water bottle, too. It’ll save you a few bucks every time you’re parched and tempted to hit up the closest convenience store.”

– Mind the excessive bar tabs

Frequent happy hours can inflict much unhappiness in the long run for more reasons than one.  CNBC’s reporter Emmie Martin offers a fail-proof and money-saving strategy, ” Either order alcohol or food, but not both. If I choose to go out to dinner, I skip the wine. If I head to the bar, I commit to cooking dinner myself when I get home.”

Other tips include cutting back on inflated cable bills, streaming services and keeping up with the living standards of peers and friends.

In this fish bowl age of excessive sharing on social media,

it is unhealthy to spend money on gadgets or lifestyle just to appear more affluent than you are.

CNBC also offers a few simple tips to cultivate better spending habits.

– Challenge yourself to zero-spend days

Actively avoid  buying anything once or on multiple days in a week or month and it can make a huge difference to your money stash.

– Cut out convenience buys

Resist convenience buys like a coffee on the go every morning, taking cabs and ordering takeout on a regular basis. We quote from the article, “Take inventory of your spending habits and decide what’s worth the price of convenience and where you can make some cuts. Your morning latte might be worth giving up your Uber habit for. ”

– Pause before checkout

Make watertight lists before you set out to shop and declutter your checkout cart at the grocery store or even while shopping online so that you are buying only what you need.

The simple rule of knowing exactly what you bring in and exactly what you spend — and on what can go a long way in giving you financial freedom.

And now for some concrete saving ideas

Writer Sunil Dhawan in a 2018 Economic Times article says, ” Financial planning, a lot of the times, is about investing for the long term. However, there are many needs that have to be met in the short term.  People invest for the shorter durations primarily because their goal is near or they do not want to take the risk of locking in their money for a longer tenure. Although there is no single defined period for short-term investments, anything from 7 days to less than 12 months can qualify as short-term.”

He suggests various instruments to choose from if you want to invest for the short term. These products according to him can be clubbed into two categories – one, yielding fixed income and two, yielding market-linked returns.

Fixed-income investments, says he, come with tenures in the range of 7 days to 12 months. Some of the common fixed-income products that can be used for short-term investing include fixed deposits (FDs), company deposits, post office term deposits and so on.

The piece further elucidates and we quote, ” Market-linked products are basically debt mutual fund schemes where the average duration of the underlying securities is less than 12 months. Some of the common short term market-linked investments include liquid funds, ultra-short duration funds, and money market funds.”

A financial consultant can help you figure multiple investment and saving options in terms of tenure, returns, liquidity, and taxation.

A bank FD is a safe choice for short-term investment. FDs come with various tenures ranging from 7 days, 14 days, 30 days, 45 days to a year or even up to 10 years, says the piece.

We quote, “Different banks have different duration of deposits. Such deposits can even be renewed on maturity and hence, funds can be reinvested if the need is not there. Under the deposit insurance and credit guarantee corporation (DICGC) rules, each depositor in a bank is insured up to a maximum of Rs 1 lakh for both both principal and interest amounts. Most banks allow you to invest in an FD online.”

The article informs that unlike bank FD’s, the company deposits are unsecured deposits and therefore carry a higher risk. In case of a default, the depositors have the last right on the company’s asset.

We quote, “Both, manufacturing companies and non-banking finance companies (NBFCs) issue such deposits but it’s only the former who have a short-term deposit option. Company deposits offered by NBFCs come with tenures of more than one year.”

One can also invest in post office time deposits which have tenures of one, two, three, and five years.

And if one wants to save regularly for a short-term, say for 6, 9 or 12 months, a bank recurring deposit (RD) can come in handy. Informs  the article and we quote,”In RD, one has to invest at a regular intervals for a fixed period and up on maturity will receive a lump sum amount. Most banks allow investing in a RD online.”

An alternative to bank savings account which offers the highest liquidity is s sweep-in fixed deposit known by different names like money multiplier or 2-in-1 account. One may open such a sweep-in FD by visiting a bank branch or through Net banking.

The ET piece also recommends debt mutual funds like

the liquid fund where the investment is made into debt and money market securities with a maturity of the underlying securities up to 91 days.

In the ultra-short duration fund, investments are made into debt and money market instruments where the maturity of the underlying securities is between three and six months.

According to the ET piece, in the low duration fund, the investment is made into debt and money market instruments where the maturity of the underlying securities is between 6 months and 12 months.

There is also the money market fund where the investment is made into money market instruments and the underlying securities have a maturity of up to one year.

The final piece of advice the article offers is that in the case of short term investments, the post-tax returns should not be overlooked. We quote, “In all the above investment options, the income earned gets added to one’s total income in that financial year and taxed according to one’s income slab. Further, if you need to invest for a short duration, remember, it will be more for capital preservation rather than wealth creation. It’s good not to compromise on safety for that extra bit of return in the short-term. Base your decision to invest primarily on safety and liquidity of the investment rather than hinging on the returns.”

And finally, as writer Manoj Arora says in an online article, “Stop working to earn your money. Make your money work for you, and carve out your time for yourself, your family and friends.”

If time is the only valuable currency we have, than having more time and options about to how to spend it is perhaps where true  freedom lies.

So save, invest and this independence day, earn your share of financial freedom. And earn some time to spare so that it , like money ,can be spent only on stuff you truly care about.