The most basic and essential step during difficult times is to have a budget. It’s about understanding how much money you have, where it goes, and then simultaneously planning how to best allocate those funds to realise different goals.
The financial health of households not only holds sway for its members, but it has direct bearing on the economic process. A dip in households’ savings impairs their spending capability, thereby causing a dent in their future consumption. This all leads to jeopardising the overall economy.
Precisely, in any crisis situation incomes hardly stay the same and get worse, whereas expenses shoot up due to unforeseen needs such as medical items etc. For instance, it was never in our mind that face masks and hand sanitisers will be as good as life saving items for us. Now we are spending a good amount on these new Covid 19-induced essentials. During the pandemic, prices of essential commodities surged to such an extent that the government was left helpless to reverse the trend. In fact, the uncontrolled price rise caused severe pain to the household budgets and pushed millions of households into poverty.
I am sure all of us will agree that the pandemic exposed scores of loopholes in our way of living, managing and shaping our future. However, at the same time this unprecedented crisis placed some important financial lessons, which can help us to safely navigate any future crisis. In other words, the situation, among other things especially in the health sector, prioritised money management skills as an arsenal to stay afloat in difficult times.
Here, the most basic and essential step during difficult times is to have a budget. Basically budgeting lies at the foundation of every financial plan. It’s about understanding how much money you have, where it goes, and then simultaneously planning how to best allocate those funds to realise different goals. Creating a budget always looks just a tedious financial exercise, that too when you feel your finances are already in proper order. But you might be surprised at just how valuable a budget can be. A budget helps you to keep your spending on track. Don’t be surprised to see some hidden cash flow problems uncovered that might free up even more money to put toward your other financial goals.
Budgeting makes you understand the causes of overspending and you can help put a stop to it and keep your budget on track. So what is important once you budget your financial planning, is to make sure you follow it.
One should just ask himself a few questions. Am I living beyond my means? Am I earning well but still don’t seem to be saving enough? Have I ever thought of how to save most of the money I earn?
These are the most crucial questions which one needs to answer. Your answers will definitely lead you to live on a budget, avoid expensive habits and force you to save. Adopt the saving habits and you’ll be laughing all the way to the bank in no time. It is not cumbersome. Just do a simple thing. Record your daily expenses, add them up and if you find that the total exceeds the amount of your income, then it’s time to cut down on your spending. Once you have come up with a realistic budget, avoid the temptation to overdo when you are out shopping. Cutting back on your day-to-day expenses and resisting temptation makes it much easier for you to save.
However, in the present times, saving the right amount alone does not matter, but at the same time choosing the right investment option cannot be ignored if you really want your savings to multiply more efficiently. It’s important here to understand that ‘savings’ and ‘investment’ are two different concepts. Let me explain. In the given culture coupled with our financial landscape, almost every one of us at our own level gets into money management activity every month. We distribute our monthly income which we earn either in the form of salary or business income, to fund our routine expenses like food, clothing, utility bills etc. After paying off expenses from the income, a portion of income is left and this is what we normally call, savings. The saved amount is always a reliable cushion for future needs. Thus, the more we save, the better.
In the given scenario when money is fast losing value and prices of goods & services goes up, creating wealth out of the money saved makes sense. In present times, as saving alone is not enough, it’s here ‘investment’ comes into play. For example, you save Rs. 5000 every month after making expenses towards your needs. If you keep this saved amount idle, over a period of time (say one year) you would find that the saved amount would not be enough to buy you enough things as it would have facilitated you a year ago. This means money loses value over a period of time, while prices of goods and services soar much faster than the value of money. This kind of mismatch necessitates that you let your money talk and multiply preferably at a pace much faster than inflation. So, if you want to negotiate the cost of living, which goes up every year, then investing your saved money into profitable investment instruments is inevitable. Precisely, it’s an investment which can lend you the help to create wealth.
In other words, you need to know how to make your money work for you. Park your money in any financial market – a place where you can explore opportunities not only to see appreciation of your savings, but also to protect it. Even as financial risks are inherently associated with the market, there are guiding principles to help you as an investor to navigate safely even in troubled times.
In the banking sector we have a lot of saving schemes which not only guarantee assured earning on your money deposited but also ensure safety. Here you can deposit a fixed sum for a fixed period of time suiting your own time limit. During the period you will earn interest on the deposit at a fixed interest rate. You also have an option to take the route of a scheme where you can deposit a fixed amount monthly for a fixed time.
Then we have a capital market where you can invest your money in equities and bonds. While entering into the capital market, work out three basic things: safety of the money invested, to get the money back as and when required (liquidity) and highest return on their investment. In this market, returns on investment are high, but so are the risks associated with your investment. However, you can mitigate these risks by investing in a variety of stocks. This means, distribute your money among a variety of stocks/ shares that may rise and fall at different times. This way you will insulate yourself against those big “hits” that your entire investment portfolio could suffer when one class of stock is hit hard.
Lastly, always check your risk tolerance limit before making your money talk in the financial market, be it depositing money in any bank scheme or making investment in share market.
(These are the excerpts from the forthcoming book, Straight Talk: Contemporary Banking Decoded, written by Sajjad Bazaz.)