Saving is just the first step to investing. However, merely saving will not make you any extra money.
For many, including me, saving is a big step that can be done, with perhaps, a little difficulty. A more serious problem, however, lies in the ‘expenditure’ section. It can be very hard to keep track of all that we spend on. And when you are a week away from your next pay-check, only a few thousands remain in your account. In this case, survival becomes the focus and investing takes a back seat.
This was easy to handle in my youth, when I had fewer responsibilities. Not any more. So, I got down to business one day, and decided to take stock of my expenses. I’ve continued this exercise over the last few years. It helps that my bank has a smart app to classify all my expenses. Here’s what I realised.
1) Better to have a low bank balance:
Let’s suppose you are planning an outing with friends. You are more likely to head to a restaurant that costs Rs 2,000 per head when you have a large bank balance. On the other hand, if you have a low balance, you will think twice before every spending decision. This is a good thing! It automatically helps you cut down unnecessary expenditure. So, over time, you can move extra balance to a separate investment account. I benefitted, so can you.
2) Invest first, spend later:
I used to receive my salary on the 1st of every month. The first ten days would be ‘freedom days’, when I could spend freely on food, movies, etc. The next ten days would be when I had to pay all my bills. Only then I would invest whatever was left. This was often a very small amount. I decided to turn the table entirely. The first ten days after getting my salary were for investments. The next ten for utility bills and only the last ten days were for other expenditure.
2) Auto debits help:
Technology is beautiful today. You don’t have to stand in line to pay a bill or transfer money anymore. Today, you can get all your bills paid and money transferred online by simply instructing your bank and other companies. The same goes for investments! On the 5th, 15th and 25th of every month, money is automatically debited towards my mutual funds and other investment plans. This neither depleted my bank account in one shot, nor did it give me enough freedom to spend recklessly. Plus, I was more disciplined and my credit score improved!
3) Credit card for liquidity support
Knowing my tendency to spend, I used to stay away from credit cards. Who wants to pay unnecessary interest rates! Then I realised, there is zero interest if you pay it back in the first month. This means, you can defer payment until your next pay-check! Soon, all my big-ticket expenditures were made on my credit card. I would pay off half the dues immediately. The remaining, I would repay when the credit card bill was due!
4) Credit card for emergencies
With aging parents and a young child, medical bills are always a worry. A low bank balance can be a cause for worry in this case. But the good thing is, a credit card with a high limit can always come in handy. It also buys you enough time to pay back all the dues in a month’s time.
5) RD for travel plans
Travel is never easy on the pocket. You spend thousands and even lakhs of rupees over the course of a few days. Despite setting aside money for my travel plans, it was often spent before the trip. So, I decided to put away this money in a Recurring Deposit that matures just before the trip. Not only did my travel money stay safe, but I also managed to earn some returns on it.
6) Spread out the payments
Imagine you had to buy a refrigerator, a television set and a washing machine in the same month! You would easily spend close to Rs. 2 lakhs. Wouldn’t it be easier to pay for these if you bought only one in a month? This rule can apply to your investments too!
7) EMIs are easy on the pocket, but still a drain
It’s wonderful that you do not have to spend a lump sum in a single stroke. Monthly instalments seem like a blessing, especially keeping in mind my earlier point. But, remember, it’s easy to fall into the trap of over-expenditure. EMIs are easy, but if they are too high or too many, it can be a problem.
8) Quality buys are better
We Indians are quite frugal. Given a choice, we will always opt for a cheaper option while shopping. Unfortunately, though, this often means compromising on quality. And poor quality means a smaller life. You, then, end up buying more often. It would probably be cheaper to buy high quality products once and for all.
In the one year that I carried out this experiment, I became more conscious of my spending habits, eventually managing to grow my wealth faster.
While credit cards come with a host of benefits, they must be used carefully, and never in these situations!