How to automate your finances (lifehacker)

automate your finances

     Financial success is not just a “piece of cake”.

     People often failed to maintain consistency in savings or investments. Sometimes they spend more than their income.

     I was not exceptional!. I too made the same mistake when I joined my first job.

     In 2015, I was excited about starting my career as a software engineer. I have no debts, no saving plans, and no financial dependencies.

     Nearly 80- 90 percent of my salary will get drained within the first half of month, I try to manage myself till next paycheck by using the remaining 10-20% of my salary. It created me a stressful life because I always have to think before spending every penny.

     Sometimes I manage myself within that remaining amount of my paycheck. sometimes I fail and end up by borrowing interest-free loans from my friends which I have to balance in the next paycheck.

     Not only me but nearly 85 percent of people when starting their first job, failed to plan how to spend money wisely.

     Even planning alone will not help one in the finance. I have seen people who have completed their degree in finance, ends up with debt even after knowing ins, outs, ups, and downs about money.

Why People are failing in financial planning? 

      Because information alone is not enough. Especially when it comes to managing money, 80% (or more) of your long-term success comes down to your behavior around saving, spending and investing, The other 20% comes from knowing what to do.

     So, Financial success is the end result of  “How we are planning?” and “How well we are managing money?”.

     Financial planning will not be the same for all because not everyone’s needs/expectation/goals are the same.

     But there are some basic parameters like investments, insurance, emergency funds need to be considered in your financial planning. If you want to know more about how to split your income and what are the things to consider while planning. Please refer 6 jar system of money management“.

     Financial planning requires knowledge and information. It also covers prediction of unfortunate expenses like fine for not wearing a helmet, your air conditioner services etc. This is the place where your real financial intelligence will get challenged.

      we understood that 80 percent of financial success relies on financial planning. Now we are in 2nd step of “Managing money”.

“You must gain control over your money or the lack of it will forever control you.” – Dave Ramsey

     Before I start telling you about money management, I want you to understand how money flows for different sets of people.

CashFlow of Poor People

      Poor people think that only making ‘more’ money makes one rich.

      Poor people will not have any financial plan. They start to spend when they get paid.

       Potentially 99.99 percent of poor people when they are older, either they have to work to make money or they have to depend upon their family members to subsidize their lifestyle.

     Are you one among them based on your money behavior or money psychology?

     Have you tried to save money and failed often? Do you want to know why?.

     Here it is. Poor people fail often because of their cash flow

cash flow of poor

       Poor people will try to control their money flow using one or two accounts. It sounds crazy. you may think how maintaining money using a single account will become the reason?. I will tell you why?

 #Impulsive Buy


Impulsive Buy

     Buying unplanned products emotionally with or without any need. This is called impulsive buy.

     For example, We are all entering the shopping mall with some checklist of items to buy. But actually, we are not only stopped with buying checklist of items we also purchase some additional items. At the worst case, we might end up buying some candies near the billing counter. This is termed as an impulsive buying.

     Since poor people are not having any plans. Poor people will easily get attracted by the discount banner, offers (big billion days) etc. They start to spend money on buying unplanned items frequently by thinking that they are having more money in their account.

 #Overspending

overspending

     Poor people spend their paycheck before the end of the month. Mostly within first 15 days of the month.

     This is because they spend money without thinking. Even they will not check the market price of the product before buying it. They will get worried only after spending the money.

     This kind of phycology towards money leads poor people to the overspending of their paycheck at the beginning of the month. And then they try to count their days towards next paycheck by compromising their lifestyle.

 #NoTracking

No Money tracking

       How poor people spend money?

       Poor people will not have any specific spending patterns. They spend money in every place without realizing that they are spending.

       Once in a blue moon, poor people try to come with the plan of saving money.so, they start to analyze their last 2 or 3 months bank statements and then come up with the budget. But it will not work. 

       Since they are using a single account it will be difficult to find the place(s) where the actual leakage is. Sometimes we overspend, sometimes we act as a middleman etc.

      We are not going to have festivals every month. So budgeting should also consider seasonal expenses.

Cash flow of Middle-class people

     Middle-class people who pay taxes, bills on time. All they need is some good amount of money in their savings account, a home, a car, and a few vacations. Their life ends within this. But they are really happy with their way of lifestyle. They may get retire around the age of 60 if they planned well they can be able to retire a bit early.

     Their cash flow will be like this

cash flow of middle class

Cash flow of Rich people

    Rich people count every penny.  They have their budget and stick towards it.

     “A penny saved is a penny earned.”

     In order to have control over their money. Rich people use Jam-Jar approach.

   What’s the jam-jar approach?

     Jam-jar approach means making a budget and splitting your money up into the various ‘jars’ you have for each area of your budget. It means you can see exactly where your money is going.

     Instead of jar rich people uses different bank accounts. It gives them how much they are having on each area of their expenses.

     For instance: if you are planning to buy a bike worth 1 lakh rupees. It is good to open a savings bank account and start putting 10,000 rs for 10 months.Cashflowofrich

Good Tracking

      Jam-jar method will give you good track of your money on each expense. It leads to giving more clarity while budgeting next time.

Help you achieve your goals

      Jam-jar method reminds you every time if you are considering spending your money on this bank account for any other expenses.

Note: Naming your bank account with your goal will become an added advantage.

Effective and stress-free budgeting

     Jam-jar method will provide you enough information to find the unnecessary and also unexpected expenses. You can use this information to come up with better budgeting plan next time.

    ” if you want to be rich, you’d better make a budget “

Financial Planning: The magic of budgeting and automation

     Find out the answers to the following question. It will help you set you

What are your income sources?

     In my case, it is my paycheck.

What are your monthly expenses?

     Rent, food, travel, grocery, fuel, bills (phone/ electricity), daily needs.

How much debt do you have?

      I had to pay my personal loan and vehicle loan. 

What insurance do you have?

       I have insurance which is provided by my company (Health – group mediclaim insurance policy). But it is not sufficient, everyone needs to have their own personal insurance.

     No life insurance for me. But if you are having dependents it is must to have life insurance.

How much emergency fund you have?

     I have my ICICI coral credit card with a limit of 50 thousand which I am planning to use in case of emergency. Additionally, I have saved 15 thousand rupees but it is not sufficient to manage. I am on my way towards saving for my emergency.

what’s your retirement plan?

      I have EPFO(mandatory) but it is not sufficient.

Started your savings plan ideas?

     By the myth of finance, savings plan should be less than 3 years. 

     I  just started a plan to save money for my vacation for this year.

     You can save money for your new Bike, Electronics or iPhone etc.

Did you Plan your unexpected expenses?

     “The twists and turns of your life can be so unexpected, and that’s a good thing to learn.”

      Life is full of unexpected things. We don’t know any white crystal magic to predict the future. But we can be able to prepare before any disaster happens.

     So it is important to allocate some gems in unexpected expenses column of your budgeting. Here are some unexpected expenses you may come across

  1. Medical bills
  2. Pet Emergencies
  3. Auto repair
  4. Fines and taxes 
  5. unplanned travels( eg. marriage) etc.

NOTE: Emergency fund is different from unexpected expenses.

Do you have any investment plans?

     The most important thing in budgeting is allocating money for investment. You have to invest as much as you can to build your wealth.

    You have to consider this part only after completing saving some emergency funds.

How much you spend on your pleasure?

     If you plan well and taken care of all the above then, you are free to spend the remaining money on your happiness.

     It helps you in sticking towards your goal. 

How to allocate funds and types of investment

You should prepare a table, allocating the right percentage of your income to your potential expenses.

    Once you come up with your goal, you need to choose your investment product based on time frame.    

    If your need is undetermined for eg fines or taxes. I recommend you go with high interest paying bank accounts.

     If your need is less than 3-5 years go with corporate bonds, RD, FD or debt/Large cap based Mutual funds.

     If your need is above 5 years like retirement planning or planning to buy real estate. I recommend you to go with Equity based Mutual funds or stocks(if you have confidence).

Sample allocation and type of investment for you.

    Category  percentage(%)  Example  type of investment
 Day to day expenses for the month.     40% Rent, Food, Fuel, the monthly visit to the home, local travels and bills(electricity, phone, credit card) etc.     Savings Account
 Loan or EMI     15% Loans (Educational loans or Home loans or personal loans)     Savings Account (named as loan account for our convenience)
 Emergency Funds     5% Only for emergency RD, FD or Debt based Mutual funds.
 Insurances     5% Health, Life, and Vehicle  RD or Debt based Mutual funds or savings account.
 Goal-based Savings     10%  Vacation, iPhone, Furniture, camera etc  RD, FD, Post office Time deposit or Debt based Mutual funds.
 Investment      10%  Real Estate or business Stocks, Real estate or Equity based Mutual funds.
  Pleasure account or Fun account      5%  Buying expensive shoes/shirts, dine in etc high interest paying savings account
  Buffer for unexpected expenses      6%  Gifts, bribes, fines/fees  high interest paying savings account
  Retirement Savings     4% (vary based on your need and years remaining to retire) NPS, PPF NPS, PPF or Equity based mutual funds
  Give    4%(optional)  The donation, Helping others  Savings account / Mutual fund

Here is the cash flow of my income. Make the best use of it for your financial planning.

Automate your finance

Online banking has grown well. Now its time to use the power of online banking and set auto transfer for each plan.

Points to remember

  1. Keep separate accounts for salary and expenses.
  2. Automate everything from a centralized account.
  3. If possible name the accounts by your goal name like Emergency fund

Conclusion:

 If you are thinking that you are not having a high paycheck to manage. Then you are wrong, you really not understand well about money.

     Let us assume that you are playing a mobile game. You need to follow the strategies and instructions to complete each level as per the game. In the same way, you need to follow some strategies to win the game of money.

     So I conclude by saying that it’s not about how much money you earning, It’s about what you do with that money matters.

  Please write in the comments ‘what mistakes you are doing with your financial system and how you are planning to improve?”

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