Personal Improvement Blog
Archive for March, 2009
The 3 Pillars of Financial Planning
Mar 6th
In these days of financial troubles everywhere, I am thinking a lot on improving my financial situation and hence you may see most of the posts are on personal finance
“Insure your Child’s Education AND SAVE TAX”
“An insurance Plan for your golden years”.
These are the headlines screaming from Billboards on the way to work. I can’t help, but cringe when I think that I have fallen for these ads earlier in my career. One day, it struck me that there are 3 components to managing your money in the short and long term. I call these the “Pillars of personal financial management.”
Wealth Creation
By Wealth Creation, I mean creation of a corpus for all your major needs in life This includes planning for an Emergency Fund, Children’s education, lifestyle improvement (home/vacation), retirement etc.
Insurance
Insurance is a de-risking strategy that allows your dependents to maintain the same lifestyle if, God forbid, something happens to you. When I say insurance, I am talking of pure risk cover with no (or very less) money-back policies.
Tax Planning
Planning for saving tax simply frees up more money for you to spend – either on yourself, for wealth creation or for insurance.
How they are related
Tax savings can lead to wealth creation or insurance. Wealth creation, such as investing in PF or mutual funds and Investing in insurance can provide tax savings.
Experts advise to keep these three separate, but as I said, most financial products try to combine these options. By itself, that is not bad, but these products are linked to the market, which means you are putting your money at risk! If you retire and there is a recession like the one we are in now, all your savings are lost unless you have chosen the most conservative option. If, like me and most others, you have not actively managed your risk option inside these products, you are liable for a shock.
Only a good financial planner will help you assess your financial state, expectations and create a comprehensive plan that will maximize your wealth, while saving you taxes and de-risking you through appropriate insurance.
Disclaimer: I am not an expert on finance – information and tips here are for sharing my experience and your understanding only. Please consult a qualified financial planner for any financial decisions.
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3 steps to avoid “Money Leaks”
Mar 2nd
Sometimes, it is necessary to step back and revisit the focus areas – be it in life or in a blog. This blog is dedicated to helping people better their quality of life by making small improvements in their lives. Work, finance, self-development are usually what I write upon. The timing of these usually tends to parallel the area where I am working on, so that it is also a chronicle of my efforts in becoming a better person today.
Do you have a situation where you are left wondering where you spent that Rs. 5000 ($100) and finally put it under the GOK heading? Then this post is for you.
GOK=God only knows
In many countries around the world, cash is still king. I am not talking about Business Strategy, but at a more personal level. While plastic has become the de-facto method of transacting, cash is still important, especially for purchases and deposits below a certain amount.
In India, for example, you cannot use a card for payment, except for fuel purchases, unless the bill comes to INR 300 ($6). Therefore, when making multiple small purchases like a can of coke or stationery, you have to use cash, typically drawn out from an ATM. This can lead to “money leaks” – a state where you cannot account for money when you are looking at your monthly statement.
In 5 easy steps to find out where your money is going, we looked at going through your bank and credit statements and then setting up categories for your spending. This is possible only when you know what you spent the money for! If you have a series of cash withdrawals, without any corresponding attribute/bill, you cannot effectively track your money. Meaning, you cannot budget effectively.
Here are some tips to help you prevent such money leaks:
1. Add a “payment method” column
Add a column to your budget tracker named “payment method.” As the name suggests, you can put in how you are going to pay this item – through card, cheque, bank transfer or cash.
2. Consolidate Cash items
Withdraw enough cash to cover all the total cash items and divide them using the Envelope Accounting method. This will prevent you making ad-hoc withdrawals from Automated Teller Machines (ATMs) during the month. Once you pay the bill, mark it in your budget-tracking system.
3. Track your micro-purchases
This is possibly the most difficult part – tracking your small purchases – the coffee with a friend, the quick pizza while waiting for a train types. Don’t sweat the small stuff, though, unless you are penny pinching!
In your mobile or in a pocketbook, jot down the expense under broad categories for the expense, such as food/fuel/book/transport etc. Transfer this to the budget as soon as you get your computer.
Remember to plug this information back into your analysis of spending, to get an idea of such expenses.