Understanding personal finance
A sneak peek into how I have been managing my finances
On Mar 23, 2020, the Prime minister of India ordered a 21-day nationwide lockdown, which was followed by a series of lockdowns. We had never seen a pandemic of such a scale in a decade. People lost jobs, lost dear ones, migrated from one part of the country to another, and were forced to work from home. We had never imagined how our lives could quickly turn upside down.
One year later, we are still stuck in the COVID world. And with the second wave of COVID numbers surging up daily, we are still unsure how long we have to survive in this new normal. Although there is a glimmer of hope with the vaccination drive, COVID has changed many things which will take multiple years to recover.
I want to talk about one of such things severely affected by COVID — our finances. It is one of the crucial aspects that we often don’t talk about (unless Elon Musk tweets Gamestonk or dogecoin). COVID made me realise the importance of managing my finances well and building wealth over time to help keep me afloat in these odd times.
I started my job in 2019. Having just graduated from college, I was now earning more than I could spend. And thanks to my frugal lifestyle, I had a significant disposable income. I spent all this extra money travelling, partying, eating out, and buying expensive gadgets and clothes. I was least worried about saving. Even if I saved some money, I would leave it in my bank. My idea was that I had just started earning money so I could delay saving for at least 2–3 years and focus on enjoying my 20s. Besides, there was too much to comprehend before deciding to put my money anywhere else. Having grown in a middle-class family, I didn’t want to risk losing money that I already had. I thought I could take my time to figure out the perfect investment strategy for my money before beginning this journey.
But life doesn’t work as expected. COVID hit, and I was forced to work from home. For 2–3 months, I didn’t realise what was happening. Every day I used to hear news about layoffs. My friends were losing jobs. And so were my family members. Slowly the fear of getting laid off started lurking inside me too. It was tough. And then my fears realized. Gojek also decided to lay off some of their employees. I quivered.
“I don’t have enough money to wait for 2–3 months until I can get a job anywhere else!”
“How will I pay my rent?”
“From where will I be paying my bills?”
“My parents don’t have enough money. Who will help me?”
Thoughts like these started taking me over.
Fortunately, I wasn’t laid off. Maybe Gojek found me relevant in navigating their way through the COVID uncertainty. There was some relief. But I was still in shock. This could have happened to me. It was happening with my closest friends. There could be another round of lay-offs. Who would know? To avoid getting into such a situation in future, I resolved to save money.
I started watching youtube videos, read articles, and studied from Varsity by Zerodha. There was just so much to learn. One common advice across all these mediums was to start investing early and immediately.
I took some money from my savings and bought some large company stocks for a start while continuing my reading on the side. While it has been just a year since I started understanding personal finance, I have already gained my confidence back. I am happy that I have started investing, and with some stringent goals set up for this year, I am sure I will be able to come back on track.
Thrilled with this newly found knowledge, I want to share my notes on how I have been managing my personal finances. My hope is that if you find yourself in a situation similar to mine, some of this might help you. However, I’ll reiterate that it has been just a year since I started this journey. What worked for me might not work for you because our budget, risk appetite, and goals may not be the same. So, take this with a pinch of salt.
Before I start talking about my story of managing finances, I want to clarify why you should be managing yours too as well.
In short, the value of money decreases if the money is kept in the bank for a longer time as the bank gives a return of only 3–4% annually. India’s current inflation rate is 7%. In order to avoid this, it is important to ensure that the return on your money is beating inflation annually, at least. The way to do that is by investing in assets like stocks, ETFs, MFs, PPF, and EPF. Know more in detail about inflation and why you should be investing here.
Now since you are on the same page, let’s go…
#1. Tracking my expenses
One thing that I had always been doing well (that I realise now) was keeping track of my expenses. I used to do this with the help of the wallet app. There were other apps like Walnut and IndMoney where I could track money, but I liked this app because it lets me create multiple buckets to track my money more granularly — something that other apps were not as good at.
Continuing this practice, I religiously track my daily finances to this day. This helps me keep track of expenses against shopping, food, travel, rents, trips, bills, subscriptions, etc. Once I record the expenses, I can analyse them over the months to understand how much money I need every month for the fixed expenses (rent, bills, etc.) and variable expenses (food, shopping, travel, etc.).
I do it manually at the end of each day because it helps keep me aware of my finances daily, due to which I stay on track with respect to my set budgets.
If you’re not doing this already, I would recommend creating an excel sheet or using any of the mentioned apps to track your monthly expenses. Also, consider your annual expenses like streaming and fitness subscriptions and divide them by 12 to add to your list of monthly expenses.
#2. Creating spend buckets
Thanks to my tracking habits, I have all the data to categorise my spending into three buckets — Needs, Wants, and Savings.
- Needs- All fixed expenses come in this category, e.g. rent, bills, subscriptions or loan EMI.
- Wants- All variable expenses come in this category e.g. food, travel, shopping, etc.
- Savings- The money that isn’t spent
There is a general rule of 50–30–20 for dividing the monthly income that I follow. The intent here is to not compromise my lifestyle while saving money. Hence, Savings is the least (20%) while Needs is 50% and Wants is 30% of my monthly income.
On the first of every month, I separate my savings from the rest of the income. I use this amount to save for my short term and long term goals. It ensures that I follow the discipline of saving every month and prevents variable expenses from affecting it. Every month I also try to reduce my `Wants` while keeping ‘Needs’ fixed. It allows me to save more if needed. Though I am not very strict about it. I just try saving regularly without compromising my lifestyle.
#3. Preparing for emergencies
Before starting any investments in risk assets, keeping some amount aside for emergencies has been critical to me. This ensures that I have enough money set aside to use promptly whenever needed.
There are two broad types of emergencies that I stay prepared for-
- Medical: Situations where my family or I might get hospitalised or in the event of a death.
- Financial: Situations where my sources of income are cut or if I need more money than I earn.
If I do not set up my emergency fund, it is likely to tamper with my investment routine if any such emergency occurs. However optimistic I am, I cannot deny the possibility of these situations. I do not want to disturb the magic of compounding. Hence I have got insurance and emergency funds in place first. (though I still need to finalise my term plan.)
Since Insurance is used for medical emergencies, I don’t see it as an investment asset. I don’t expect any returns from it. There are two important insurances to consider — term (in the event of death, money is transferred to the closest member of the family) and medical (if I’m hospitalised, the insurance company pays money to the hospital). Here are the links to understand term and medical insurances.
With insurance taken care of, I have started keeping some money aside for building an emergency fund (3–6 times the fixed expenses). I keep this money in a liquid fund that has low risks. If you want to build an emergency fund for yourself, choose anything which has low risk (i.e. money is safe from the stock market fluctuations) and high liquidity (i.e. you can take out your money and use it instantly). You can do this with a debt fund, an ultrashort FD, liquid funds, or even with a savings account.
#4. Understanding short term & long term goals
With emergency funds in place, I can focus on my short term and long term goals. I define these as follows:
- Short term goals: Any planned expenses coming in 3–5 yrs, e.g., buying an expensive gadget or planning a Europe trip.
- Long term goals: Any planned expenses after five years, e.g., marriage, child education, getting home, and retirement.
I separate some amount for short term goals from my savings. How much I separate depends on how much time it might take to reach the amount needed for my short-term goal. I put this money in a low-risk asset — a fixed Deposit. Other options are recurring deposit, debt funds or ELSS (slightly higher risk and comes with a 3-year lock-in)
The remaining portion is what I use for long term investing. I use the Groww app for this. I love their simple and easy UI. Other options are Zerodha, IndMoney, and Upstox.
#5. Long term investing
This is the part that I love to talk about so much that I can write a separate article on it. Here, I will just give an overview. I have divided this into two categories-
- Retirement corpus- Money that I will need after retirement. I calculated how much money I need for retirement using this link. It’s my annual expenses compounded on the inflation rate (7%) until the age I plan to retire. PPF and EPF cover this for me now. Since these are government-backed funds, it ensures that the retirement amount is secured. Another option is NPS.
- Everything else- This is where I can take maximum risks and expect maximum returns. Finance has a golden rule — More the risk, more the returns. I put this money in equity investments and a tiny amount (5%) in gold for diversification. Another option for diversification is Bitcoin. (Since it is highly volatile in nature, I recommend putting a small amount like 10% here.)
I prefer Sovereign gold bonds for investing in Gold. Other options are digital gold, gold ETFs, gold mutual funds and physical gold. Read here why I chose Sovereign gold bonds.
I have kept other small portion of funds in mutual funds (MFs) and the remaining large portion of it in direct stocks for equity investments. Other options are smallcase and ETFs. You would need a Demat account to invest in stocks. All of the mentioned apps allow you to open one and it’s a super easy process.
For MFs, I prefer index funds. Here’s why.
Since MFs come with expense ratios, I try to avoid buying other MFs. One advantage of MFs is that it allows me to set SIPs. Every fourth of the month, my SIPs are deducted automatically.
I have bought primarily large Indian companies stock. I recently purchased some US tech companies stocks as well. I buy these stocks every first of the month, irrespective of the price.
#6. Understanding taxation
People hate taxes when they have to pay them. Thus, understanding how to save on taxes is very useful. I put most of my money in equity investments and not in FDs, debt funds, or gold because of lower taxes on the former.
Equity investments-
LTCG: No tax if returns are < 1 lakh, otherwise 10%
STCG: 15%
Debt investments-
LTCG: 20% with indexation benefits
STCG: As per the income slab
Fixed deposits-
As per the income slab
Dividends-
As per the income slab
Interests on Bank account-
As per the income slab
Hence, you can save more by putting money in equity or debt as compared to traditional investment tools such as FDs or bank accounts. Read in detail here.
#7. Following the discipline
The whole planning is meaningless if I don’t follow the discipline of sticking to it. I need to keep my emotions in check and avoid any impulsive decisions. Over the last year, I’ve seen the market going from an all-time low to an all-time high. The market is still very volatile but it always goes up in the longer term.
In such times, I want to keep my emotions in check and hold on to my investment plans. I recently read an excellent book on this topic — “The Psychology of Money” by Morgan Housel. I would recommend you to read it.
Here are some great quotes from this book-
“Doing well with money has more to do with our behaviour and less with how smart we are”.
“You’re NOT a spreadsheet. You’re a person. A screwed up, emotional person. People don’t make financial decisions on spreadsheets. They make them at the dinner table or in a meeting room, where personal history, your unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.”
I hope you find these insights from my personal finance management helpful. I would recommend you buy a small stock and get started in your investment journey immediately. Doing it yourself is the best way to learn after all.
Let me know what you would like me to share next. Otherwise, feel free to connect with me over Twitter @nikhilshares
Until then
Happy investing !!!
Credits: Thanks, Vineet Arora for helping out with grammar edits, Udayan Vidyanta and Shashank Sahay for early feedback.
