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How to spend your money?

In the previous article, I had discussed how to convert debt into savings. And by now you should have known the math. We also understood that in order to achieve Financial Independence and Retire Early we have to save a large portion of our income as savings. I had suggested saving about 60% and living with 40% if you do not have any loans. By spending less money we save more.

To understand how you spend your money it is necessary to observe them. We should first become aware of it. Write down our expense by observing. Till a few days back I had absolutely no calculation or limit of what I am spending for and where I am spending. Its is not easy to observe the expense all together all of a sudden. It is going to take some time for us to become mentally aware every time we take the money out. That is why we need to do the opposite of it.

It’s called Budgeting. Just like how Income (minus) Savings equals to Expense we have to re-think here too. Planning an action before its made is very necessary here. Our goal is to save. So I have started to budget my monthly expense before I spend. And in my monthly budget, the first entry will be Savings – 60%.

Let me get real here. There are so many expenses that I do. But when I sat down and thought what are the things that I cannot live without I was able to list a few things. This took a lot of self-control but finally the following we absolutely necessary. Apartment Rent, Food, Clothes, Utilities, Insurance Premiums and Travel. The last two points are something that is not necessary but I added it for long term planning. We will talk about it later. Utilities are like gas, electricity, phone and internet bills. We cannot live without the internet, can we?

Before I jump into other details let me clear this out. I also want to live a luxurious life. I also want to be wealthy. I also want a very luxurious car and luxurious house. But I want to have all these only when I can afford these. I don’t want to own any of these by taking a loan. I want to buy an original RayBan which costs Rs.15000/-. Not buy the cheap Rs.200/- googles and pretend to be rich. Not own a car and being barely able to pay EMI or maintenance. Not own a house and worry about paying a mortgage. Being truly rich means affordability and sustainability. My aim is to reach there. So in simple terms, I cannot have all this because I cannot afford any of this.

So back to my basic needs. Let’s say if my income is Rs.1Lac. Then I should be able to live within Rs.40,000/-. Let’s break this down.

ExpensesCost
RentRs.25,000/-
Groceries & VegetablesRs. 20,000/-
UtilitiesRs.5,000/-
TotalRs.50,000/-
My current expenses per month as of 30 April 2020.

It was kind of a shocker to see that I am running over my budget by Rs.10000/- I have two options. I can increase my budget and stay in my position comfortably. But I am not touching my savings percentage NO MATTER WHAT. Second I can finds ways to earn that extra Rs.10K. But first I want to review my expenses. I cannot change the Food or Utilities value. But the rent is something I can rethink. I live in a 2BHK. Currently, the house is too big for just two of us. I think I can find a 1 BHK at Rs.15K. This will be the first luxury that I will be giving up because I do not need it and second because I cannot afford it. At the time of this writing, I have started looking for a smaller house. I’ll let you know how it goes.

About that extra Rs.10,000/- that I can earn. I still want to earn that but I want to start a SIP. This is the mindset that I want to bring in myself. I want to save in all ways possible and limit my expense.

Mutual Funds SIP Calculator
An investment of Rs.10000/- for 10yrs with an average 12% interest can give compounded growth of 23Lac. Thats almost twice of the amount I invested – Rs.12Lac

I think spending the extra Rs.10,000/- like this makes more sense to me than living in a home that I don’t need. Spending less money is always better. I want to bring this mindset to everything. When I walk into a mall and I see anything I like I want to ask myself first. “Do I need this really?” And I will listen to the first voice I hear in my head. Mostly it says ‘no’.

Then comes a question that I have asked myself more times than ever. “What is the point of not living my life today? What if I die tomorrow and not enjoy all these?” Well, now I have an answer to this for myself. I have reached this point of having more debt only because I thought like above. What if I die tomorrow and leave all these debts on my partner or children’s shoulders? Won’t that be too selfish? Yes, I know what you are saying. I should take a term cover so that my EMIs and other expenses are taken care of after I pass away. But isn’t this just bad mathematics? First I do something that I don’t need. Then I take on more expense in the form of a term loan to cover those expenses. Mental reminder: I am spending less money.

Instead, I feel that saving of what I make will be much more appreciated by the family. Spending less money is the key. Good health and good finance is something that I want to have and leave for my family. So I pledge today to myself that I will walk more (reduce petrol cost and since I have a pet), eat less at restaurants (good for health) and stay at a cosy home (good for the wallet). I will let you know soon what home did I find and what was its cost.

By doing all these I will delay my gratification. May be occasionally I will treat myself to a good movie and some ice-cream outside the cinema hall. I ain’t paying Rs.300/- for a bucket of popcorn or cola. Are you mad or what? I can in-turn invest that money in equity.

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