Personal Improvement Blog
Personal Finance
Manage those Irregular bills – how I do it
Jul 8th
Irregular Payments. I use this term for those bills that don’t occur with any definite period OR happen once in a year. Think Car insurance (and house taxes, annual maintenance etc). you get the idea.
Our initial family budgets used to have expense items for the month and we did those at the start of the month. We got wiser and then started having a standard set of items and approximate amounts for each month. We could then compare every month how we were doing against the “standard.” After a few iterations, we realized that our balances did not match what we spent (against the budget!).
The culprits were these irregular payments. What was causing even more pain was that to pay for each of these special items, we were scrambling at the last minute to make the payment (which was usually large). A few brainstorming sessions later, we came upon a few tricks to avoid such situations.
1. Create a timeline 
We made a list of all the possible payments for the year. These included
- Insurance payments
- House and maintenance taxes
- Car insurance
- Term fees at school for the kids
Then we put up the dates on which these payments were due. We observed that, by pure luck, there were not more than one payment on any month.
2. Reschedule Payments
If, by any chance, more than 2 such payments fall in the same month, you might want to consider moving them to another month. This may not always be possible, but there may be some payments which can be moved. For example, you can switch your annual premiums to a monthly schedule for a couple of months and then switch back to an annual schedule.
The key is to schedule them such that those months don’t bunch up together. There will be a bit of inconvenience when you set this up, but it may be good in the long run.
3. Schedule micro-payments
Once you have the calendar schedule of payments ready, you can move on to the really important step. Schedule micro-payments every month for such irregular payments. Some banks in the US, such as ING Direct, allow you to create sub-accounts within your main account. If, like me, you live in a country where these are not available yet, you can put these micro-payments in a single account and track them in a simple Excel spreadsheet. It is important (and obvious) that this “special” account must be different from the account that you normally use.
These micro-payments go into your budget like any other item, so that you don’t end up messing up your budget in those months. This is especially true for those people who don’t have a set income every month (like businessmen, independent consultants etc).
Bonus tip: Start these micro-payments in such a way that you have a sizeable amount for each payment. Also, for one or two payments, this may not be possible in the first year, but for the subsequent years.
Share your tricks and tips for managing home budgets in the comments.
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.
Separate your expenses with multiple bank accounts
Sep 18th
…And save yourself mental clutter
Most people I know hold a single bank account or at the most 2 accounts – out of which 1 is a salary account. This account is used for all financial transactions in life -
- Regular expenses like groceries, electricity, phone etc
- Irregular expenses that do not occur every month but at specified times in a year like insurance, car service etc
- Miscellaneous expenses for items such as eating out, movie tickets (or indirectly to credit cards)
Image source: Vangelis Thomaidis
Why having a single bank account is bad for you?
A single inflow and outflow box for your financial transactions does not make sense. Here’s why.
Difficult to set a budget and track against it
- If you make a rough budget, you apportion it to major categories such as groceries, electricity etc. However, your transactions don’t happen in a nice, single purchase. Most often, they are distributed over the month, making it difficult to track against the budget, especially if you do not track at a granular level.
- Also, if you are like me, you withdraw cash at ATMs for payment towards many of the expenses. This appears in your bank statement as withdrawals, making it difficult to allocate it to the appropriate category.
- For some tips on tracking your expenses, see my post on 5 easy steps to find out where your money is going
Limit impulse purchases
I have not yet reached the stage of setting limits for entertainment/eating out/impulse purchases (music, food, movies), since I can’t seem to reliably predict those expenses. You may have budgeted for it. In both these cases, it is easy to go overboard and spend more (since you have the money now).
Security issues
With almost every service provider offering the option to pay bills online, it is fast becoming the method of choice for bill payment as well as purchases. However, using the same account for online transactions may increase your exposure to security issues. With ATM/Debit cards, there is limited liability even when you complain, as the money removed from your account cannot be recovered.
Funds not available for irregular expenses
When the bills for car insurance renewal, annual premium payments or other expenses that do not occur monthly come up, you may find yourself with a shortfall in funds. You then have to dip into debt sources to fund these payments.
Low interest rates
Your savings account, even if you have a lot of spare cash in it, will earn you a measly 3.5% interest rate. Income Tax returns, sale proceeds and other spare cash tends to lie in such accounts waiting to be spent (and does vanish into GOK accounts!)
Solution: Create separate accounts
Regular Bills
Setup specific accounts for regular and irregular payments. With most banks allowing online payment, regular bills and operating expenses such as fuel, vegetables etc can be bought using the regular account. This regular account can be the pay-linked account provided by your company.
Irregular Bills
Total all irregular income for the year (planned) and divide by 12, to get the amount for each month. Set up separate account for the irregular expenses and pay from that account.
Target accounts
If you have other financial goals and you have budgeted for it, either keep a separate account or use the irregular expense account.
For investments such as payments to mutual funds, use a separate account for inflow and outflows. This also makes it easier to find out your tax liability for short-tem capital gains and pay accordingly. [It also makes it easier to get a TDS certificate for such gains]
Note: In India, ICICI Bank, for example, allows you to link your accounts, so that you can transfer money between your investment account and savings account easily.
The Smart Account
For irregular and any target accounts, choose a smart money account where after a defined threshold is reached, any extra money is put into a separate high-yield account (with Fixed-Deposit rates). This account has full liquidity and you can take everything out if you need.
Note: In India – ICICI, HSBC, Citibank, HDFC Bank are among the many banks that offer this type of account.
Diversify
Ok, this is a word of caution I added after the recent chaos in the banking industry. Like any portfolio, it would be wise to spread your accounts across banks.
Choose your Account type carefully
All banks generally offer different types of accounts with different facilities, minimum account balance (MAB) and charges. Choose very carefully among these accounts to avoid unnecessary charges since you may not need to use all the features of a full-fledged account. For example, many banks offer a no-frills account with zero MAB, a basic ATM card and access to online banking for little or no annual charges. Choosing different banks allows you to avoid putting all eggs in one basket
Having separate accounts allows you to plan efficiently and avoid the mental clutter when dealing with different expenses that arise at different times.
Share with us your strategies for keeping track of different expense categories, specifically variable and irregular expenses. While you are it, please take a moment to participate in the poll below.
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Loading …5 easy steps to find out where your money is going
Sep 11th
You know that feeling – no money left in the bank, but you are not really sure where it has all gone. Oh, you might be doing a bit of budgeting and have paid off all your regular expenses. What about the rest?
Once I got started on this, I expanded the question: Where do I spend my money? Is there some "GOK" account into which my money is leaking?
Step 1: Download your account statement for the last 1 year
To understand where I am spending my money, I downloaded my bank statement for the last 18 months in MS Excel format. Citibank, where I have my account, does not give an easy-to-use download format, at least in India. If your bank offers a way to download in some other format, such as MS Money, you may find it easier to do this analysis in MS Money itself.
Step 2: Remove inflow transactions
Once I had the Excel set up the way I wanted, I removed the "Credited" column, as my goal was to analyze my expenses. I have a stable job and the inflows are pretty constant. I also removed some superfluous transactions such as cancellations, fuel surcharge reversals etc.
Step 3: Categorize your transactions
I then categorized each transaction based on a pre-defined set of tags. For example, purchases at a music store would go towards Music while purchases at a supermarket would go towards Groceries. Of course, there might have been instances where I bought some music at a supermarket, but I had no way to get that data.
I tend to use cash a lot (primarily because plastic is not so common in India as in the US and Europe), so there were a lot of ATM withdrawals.
This was an eye-opener for me, as I realized could have done anything with those withdrawals. I might have bought groceries, fuel, music or any other expenses. I did not have that level of granular data! As I wanted to get to the end by now (!), I simply clubbed all of them under household expenses.
Step 4: Analyze results
Once the transactions were categorized, I used some formulae to sum the transactions under their respective categories. A pie chart seemed the best way to show the transactions by volume, so I made a pie chart of my top expense categories.
The first category was the "household expenses" as expected. The second largest category was a one-time mortgage payment. Events, Food and Travel expenses were the next set of expenses.
Step 5: Create Goals and Make a Plan
This is all very well, but what is the use?, you may ask. Based on the data, I am not able to really see the opportunities for cutting the flab. I decided there were a few things I needed to do:
- Keep a more granular track of ATM withdrawals. I decided to log each day’s transactions in an Excel and treat the money with me as a sort of cashbox. While I need to be vigilant, I decided to adopt a balanced approach and track major expenses. Minor ones would be a sort of miscellaneous category.
- Increase use of electronic transactions in places where a Debit card is accepted. My bank does not charge me on any debit card transactions, so I should start keeping less cash.This would create a more granular transaction list.
- Keep a separate track of discretionary expenditure. I will keep the bills when we eat or go out for movies etc.
- A stretch goal would be to identify impulse purchases when we go shopping to the supermarket. While we do make a shopping list, we tend to pick some other times which we think might be good to enjoy. I am not probably going to cut those impulse purchases out, but at least know how much I spend on them.
I will redo this exercise 3 months later to see if I can identify areas of improvement. I have also promised myself that any savings I see would go into the Emergency account, which is dangerously lean these days.
Do you track your money using Excel or other methods? Share your comments, tips and tricks with us.
Following my own advice – Emergency funds
Aug 7th
After writing so much about having an emergency fund, I find that my own balance is not enough for even one month. Currently, both me and my wife work, but due to the high mortgage for my home, our pay is just enough to pay all bills.
Thankfully, we have been able to meet our commitments for previous investments, but we have not made any new ones this year, which is a cause for worry.
I am expecting some surplus this month and should be able to transfer a wee bit to the EF this month and move it over the 1-month level.