You need to set your financial goals right
at the outset. This means that you need to consider making a plan. A plan that
would help you understand where you want to go and where you are at the moment.
This will pave the way to understanding the gap between now and “then”.
Say for example you want to save Rs.500,000.
If you don’t set out a timeline for achieving the same, it would seem like a very
difficult task, but let me simplify it for you.
Plan it out
Considering the above example, let’s look
at a two-year plan to achieve this. 2 years, in other words, is 24 months. So,
this is our first step. Divide the total amount you want to save by the number
of months.
(500,000/24) = 20,833
- Goal - Rs. 500,000
- Monthly income - Rs.50,000
- Timeline - 2 years
- Monthly contribution - Rs. 20,833 (40% of income)
Say for example you earn Rs. 50,000 a
month. If you set aside Rs. 20,833 a month, you will be left with the balance
for your expenses. You have Rs. 29,167 which is almost 60% of your monthly
income. So it’s not so bad, right?
Important - Make sure to build a fund which equals 6 months' (or more) worth of expenses so that you will be able to better navigate through emergencies that get you reaching into your pockets for cash. I thank Roshane (a friend and follower) for highlighting this important tip he read off another book.
There are some basic needs for us such as the need for food, the need to commute, need to pay bills etc. So you need to be mindful of how much you are spending on these things a month. If you haven't already, make sure you maintain a rough expense statement for each day. Just write down or type in an excel spreadsheet how much you spent on what.
At the end of the month, you have a full
statement of expenses. Congratulations!
Now see how much you are left with. If you
have expenses exceeding 60% of your income, now that’s something you want to
critically look at. For most of us who pay our own housing rent and other forms
of the fixed cost may find it difficult to stick to saving 40% of your income and
may need to adjust your monthly savings plan accordingly.
This means that you do not live “beyond
your means”, not that you are expected to cut down on essential needs. Once you
do your monthly expense statement, you might realize that you are spending so
much on buying clothes (excessive amounts of clothing) and this is a clear red
flag to your plan of saving up. Unless you are rewarding yourself for weeks or
months of hard work, try to avoid throwing your money away like that especially
if you are looking to save up.
This is a must. So buying yourself something
you like occasionally as you do need to treat yourself for all it’s worth.
Consider setting up a “Standing Order” with
your bank where you advise your bank to deposit the 40% of savings to another
account belonging to you every month. In six months, you will have just a
little more than Rs. 120,000 which is 24% of your BIG goal!
Before you know it, 2 years would have
passed and here you are with Rs.500,000 in your bank account! Just imagine your
satisfaction when you reach this goal without spending an extra cent on any
kind of loan. It’s all for you!
This is just the basic concept I have highlighted
for your consideration. Be it Rs.500,000 or even Rs.5,000,000, the approach
should be the same!
What do you think? Let me know in the
comments!
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Mahen Brendon Makalande
Good tips but I think putting the money in a place that is difficult to access is also important. I have found money market accounts a good place as you can keep adding money to it.
ReplyDeleteAlso, prior to putting money aside to save, it would be good to make a 6 month rainy day fund which will cover ones expenses for 6 months if your cash flow stops or an unexpected expenses comes up. 20833 x 6 as per your example. If trouble happens, which usually does, (car battery replacement, house repairs etc) that hasn't been budgeted for, use the saved up rainy day money. Then bring back the rainy day fund balance back to what it was before you start putting money aside to your savings account again.
Hope this makes sense. Credit goes to Dave Ramsey. Look up his 7 baby steps. Very useful.
Hi Roshane, thanks and you are spot on! that's something very important I missed out in this article. Appreciate you pointing out the same and it does make perfect sense. It's always advisable to have a margin of safety.
DeleteNoted and will check that one out!