One question which each person ponders upon, apart from what is the purpose of life, is How to make money? Spending money and making money are two major aspects of this life and somewhere equally important is saving money! Financial Literacy is an ongoing topic – similar to finding the purpose of life. The 2018 NFCC’s Consumer Financial Literacy Survey[i] found that 1 in 4 Americans do not pay their bill on time almost 1 in 10 have debt waiting to be collected. 43%[ii] of student loan borrowers are NOT paying on time! Now that’s alarming , especially after a college degree.
Money as a Source of Happiness
Can money make you happy? Yes, ofcourse it does upto a point. According to a 2018, study by Gallup World Poll,[iii] a survey of 1.7 million individuals found that “income satiation of an individual occurs an earnings of $95,000 for a life time and at $60,000 to $75,000 for basic emotional well-being”. It means that we all require a minimum level of income to make us feel secure and happy enough to be able to enjoy other aspects of life.
The common practice of previous generations was to work longer hours to earn more. But the norms of work cultures are changing and the new generation, especially the millennials are looking at consulting, freelancing as a means of a fruitful life which will provide a balance with personal life. A disciplined approach to money saving becomes all the more essential to fulfil the needs and desires of life then. Let us look at in detail how you can approach the practice of money management the philosophy to adopt.
Approach to Managing Money
Most people falter in the basic approaches to the entire process of financial management. The default mindset is about saving and living with a sense of scarcity. A tough financial spot should not become the reason for an attitude of misery and also should not create a sense of desperation for material things. Striking a balance can be tough when you are deep neck.
The steps below if followed will cater to your goals and also enhance your lifestyle by creating the discipline in all aspects. How you save, how you earn, how you invest – all are interlinked to your approach to things in life.
- Budgeting is a Saving Plan
Most people are not disciplined enough to maintain a regular log of expenses. It becomes a chore to fill up a sheet with daily expenses. However, a simple log maintained in an unbiased manner will provide a good snapshot at interval of few months of where you are over-spending and potential for saving.
Look at budgeting as the first step in creating a Saving Plan. You have to do it as part of prudent investments. There are various apps available on mobile as well as desktop to ease your effort of creating a customized tool to enter daily expenses.
- Once you start using one, start comparing different expense heads and follow the logical approach of curbing expenses in that area.
- While it is easier than done, a prior mindset and self-regulation has to be created. You have to agree with yourself that once you have chosen this path of “Conscious Spending” , you will follow all the rules of the game.
- Hiring a financial coach or planner might also help for few months till the discipline sets in.
- Discuss the areas to be curbed with your family and spouse and become a check for each other’s over-spending.
- Credit Card can be your best friend and worst enemy. Use 2 credit cards to split expenses and get free credit for a month. However, indiscriminate use without a track of your numbers can give a false sense of available credit and time to repay.
- Small but disciplined Investment is Good
While keeping track of expenses is one part, making your money work for you is equally important. The propounder of this theory in “Rich Dad, Poor Dad”, Robert Kiyosaki changed the concept of financial independence when he stated the obvious in the simplest of ways. Increasing one’s Financial IQ is by investing in a disciplined manner is the way to building wealth, not just working in an office.
- There are umpteen number of financial blogs and advisory available online for anyone willing to invest time.
- In case you cannot spare time, be sure to hire a trusted financial planner through references.
- Investing is the next step after Earning and Saving.
- Even paying fees for a well-seasoned investment professional will only give geometric returns in the future.
- Quick Return, Quick Losses
First understand how investments and returns work. There are no “get rich quick” schemes which are legal – you might have a lure of creating a YouTube channel to start earning – Legit enough, true. But is it sustainable. Stray clear from schemes which sounds like pay X amount to receive X raised to n number of times in a short duration. This is the easiest form of a Ponzi scheme where you get paid initially out of the money invested by other gullible investor. However, since there is no real further investment or work being with this money, eventually the incoming investors might dry out thus leading to a breakdown of this scheme.
- No Risk, no Gain
When you are on a clear investment path, taking risks is essential to gain multiple returns. Investing in Equities is one of these choices. You can discuss such details with your financial planner to understand the risks involved in direct equity investing, how much can you really afford to lose and finally other options such as ETFs (Exchange Traded Funds) or Mutual Funds.
Depending on your Income level, Age, liabilities, dependents , and above all your willingness to take a chance, your risk appetite is determined. You can look at equity and derivatives as an investment option with proper guidance, provided the money you are investing is not out of your savings or emergency funds.
- Save and Spend per Your Life Stage
While the above rule applies, so does this one in equal measure. Even if you are willing to take risks, be sure to provide for your dependents and medical emergencies before you invest beyond your means. If you are a young turk with 20 + years to go for your active career life, you can bear some losses more easily than a person who is nearing retirement or needs to plan for children’s education. The latter should be looking at fixed interest bearing instruments along with a small portion of equity.
- Retail Therapy Can cause More Heartburn
This demands a special mention as retail therapy is the bane of prudent financial decision making. A good sale can makes the wisest of them go weak in their knees. Retail analytics show that weekends and festive seasons are the biggest push points for easy and convenient retail therapy. Even “festivals” like Valentine’s day have opportunities for marketing for couples and singles in equal measure. However, a burst of emotional shopping can cripple your financial plan like nothing else.
Shopping sprees are encountered across countries in different formats –American spend an average of US$900[iv] on Christmas gifts with an average monthly net salary of US$4,158. Singaporeans are near to it with an average spend of US$800 from a salary of US$3,973. In UK itself, RSI or Retail Sales Index is an important measure of economic activity and is tracked closely each month by the Office for National Statistics. [v]
How to Save Money – Methods and Tips
You have created a Budget. Great! Now let us look at ways to save money so you can stick to it. One question most family households have is how to save money fast?
- Create a Family Budget
The money managers of the house know how much the essential and utilities cost. Many financial experts advise on a 50/30/20[vi] approach. Here 50% of the income is dedicated for necessities, 30% for wants and desires and 20% to savings. Investing this 20% smartly to finance your future goals is the key.
In the family, one spouse can take the role of “Cost Controller” to keep a tab on good deals available on essentials like groceries and miscellaneous things in the house. Ensuring a control on unnecessary expenses can be fruitful in the long run and create a discipline in kids as well.
To instil a sense of correct spending, give your kids only hard cash as pocket money and take a percentage from them to put in a savings account. Parting with real cash is always hard and will teach them from early on that saving a portion before spending is essential.
- Savings plan
Finding cool discounts, reward programs, even loyalty programs can save up to the tune of 20 – 30% of your actual expenses. Credit cards come with various facilities such as discount on billings on specific locations, airport lounge access, freebies, movie ticket discounts and various other things. The idea is to subscribe to a card which provides certain benefits which you can avail. All these small savings sum up to a large amount.
How to Make Money
There are multiple ways to make money. You can augment your primary income in many ways.
- Secondary assignments such as freelance work and on-demand consulting.
- One can look at monetizing certain hobbies and find segments of people and communities where you can share your creative products and also earn money. This way you can start building a name for your art and a brand in future.
- Most importantly you need to find suitable investment options per your risk and financial goals for future
There are multiple investment options you can look at –
- Equities –these are the most common choice of investor due to ease of investing and associated hope for quick riches. However, stock selection should be done only after careful study of the economic environment of these stocks, competitors, management operations and share price movements. A suitable level needs to be looked at for investing.
- Debt – You can invest in T-bills, government bonds, short -term debt papers issued by the government. However, one needs to know the basic eligibility criteria a minimum certain amount is required for retail investors. Also, first understanding the process of applying and redemption.
- Mutual Funds – These are the easiest instrument of investment for retail investors where they can only buy the units of a well-performing fund with either equity/debt or balanced orientation. Investing and redemption is easily done through basic accounts and one can track the performance via regular statements. You also have the flexibility to create a portfolio of various mutual funds to create a cushion of debt oriented investments and the high risk-high reward benefits of equity investment.
- ETFs – Exchange Traded Funds are a similar collective investment vehicle but for tracking a particular index. This way you can also purchase “units” of the index and gain atleast equal to the index performance of your country.
- Banks and other deposit accounts – these are considered the safest accounts as they are guaranteed by the government through their entities. Also the time deposits are a good option in a high interest rate time period
- Futures & Options – These are instruments for real risk-takers and experienced investors. One needs to understand the risks involved as these trades work on high borrowing called as leverage. However the gains can be multi-folds if the call goes correct.
How to Spend Wisely
Most of us are clueless about if we are spending our money carefully or not. This doubt leaves either a fear of spending money or the indecisiveness on how to spend our money.
The wisest way to look at an spending decision by
- Cost- Benefit analysis
When comparing 2 or more options – which grocery brands to buy , which holiday package to choose – list down the costs breakup of each along with the associated benefits. Then rank the benefits for each option and cost. If the one with maximum benefits suits your cost budget – go for that. This will work only if both or more options mean the same to you. Herein the emotional bias of preference will always creep in and may make you change your mind finally. If you can afford it without considerably damaging your bank savings, go for it.
- Opportunity Cost
This is the most used economic concept in daily life. It is the cost you incur for choosing one option over the other. If you eat apples over oranges – both cost different. However, the satisfaction in one might be greater than the other. Hence this is not only a numerical measure but also a sum total of the intangible benefits one might receive – Ease of purchase of apples, flavour of the apple which you favour. However you let go of the cheaper oranges and maybe some extra Vitamin C! This way opportunity cost will be different for different people.
Professional Management of Money
Finally, for making all of the points work for you and getting you in the habit – professional services can help in a big way.
Money Management though financial planners is one option. A financial coach will understand your spending and earning habits and guide you on a day to day basis. Credit Counselling will be useful for advising on how to fulfil your various debt and in what manner can you do so in the best way possible. Debt Consolidation Companies come into the picture if you need to service a larger mound of credit card bills or home mortgage but are unable to. They also help in setting your credit score right by advising you to control your spending and keeping a minimum balance in your bank accounts. Finally, you can always self-help and utilise the various freely available Money Management Apps which can give you alerts and reminders along with tips to invest and save.
[i]2018 FINANCIAL LITERACY SURVEY https://www.nfcc.org/clientimpact/2018-financial-literacy-survey/
[ii]4 Stats That Reveal How Badly America Is Failing At Financial Literacy https://www.forbes.com/sites/danipascarella/2018/04/03/4-stats-that-reveal-how-badly-america-is-failing-at-financial-literacy/#6ec640af2bb7
[iii]Happiness, income satiation and turning points around the world. – https://www.nature.com/articles/s41562-017-0277-0
[iv] Commentary: Retail therapy won’t repair your damaged sense of self-worth
[v]Retail sales, Great Britain: January 2019 https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/january2019