We are in the midst of unprecedented times which has and surely will continue to affect our finances. Everyone out there is now realizing how important it is to be economical when spending and possibly, even try to save. Zulfikar Rahman, The Head of Finance and Operations at Newscred Inc. shares his candid thoughts on spending wisely, saving and being more efficient with your finances.
We have surely heard of the phrase “Money cannot buy happiness” but these mostly came from those who have a lot of money. In reality, when you don’t have money or have a lot of debt, it becomes a source of a lot of stress, pain and frustration. It impacts not just on your mental state but even your loved ones. But it’s not easy to suddenly make a lot of money now, is it? To add to that, everywhere we go, online or physically, we are constantly tempted by products and services that might not be essential for us, but they entice you and before you even know it, you’ve paid for it only to never use it. Sounds familiar?
If you’ve read this far and are still reading this, it clearly means that you are serious and probably, have the same shortcomings as the rest of us. My goal is to give some ideas that I personally have been using which have proven to be fruitful. These are steps that I know work for a lot of people and is already making my financial life a lot better. I honestly wish that I had applied these earlier in my career where I was making a mere 4,000tk as a Trainee Accountant. It took a month to make that amount and only three days to spend it all. Not to mention, regret and shamelessly repeating these actions time and time after. But hey, better late than never right?
What’s always a good first step, be it in business or personal finances, is to look back at what we have been doing in the past. We, as humans like familiarity and once we look closely at it, we find trends and spending habits. So to identify it, it’s important to track our income and expenses. Tracking expenses on a daily basis might sound like a daunting task but once you start, it gets addictive and you will constantly keep updating it once it becomes a habit. You will find out things about yourself that you never realized before and may even be surprised by some trends. For example, realizing that you were spending almost 4,000tk on Coffee each month. Yes, that was me and I have never been the same since!
Now you can do the tracking manually on a notebook or an excel sheet but I personally recommend getting an expense management app. There are many available for free and are extremely easy to use so you won’t feel overwhelmed. After tracking your expenses for a month, you’ll be able to identify where you’re spending most of your money. This is when you can analyze it and make calls to identify “reductions”. The trick that I use is to categorize them into “Necessities”, “Nice to haves” and “Not needed”. Maybe you don’t need both Netflix and AmazonPrime subscriptions. Maybe you should limit visiting restaurants from every day to once or twice a week or less. Maybe instead of using your credit card for reward points and then forgetting to pay the bill only to pay interest on it, you could actually use your debit card. Maybe you do not need to buy “latest and quirky” gadgets from that online page. These sort of tiny decisions can lead to major reductions in spending and yes, all these examples were real decisions that I took. I believe everyone will agree, this pandemic has made us realize that every penny matters and with these reductions in expenses, gives us an idea of how much money we need at a minimum to survive each month and also gives us the scope to create a plan of action.
An action plan can be anything but the way I like to paint the picture is that the plan should be able to achieve “financial freedom” i.e. when you’re not worried about living paycheck-to-paycheck; when you don’t have to think about money before making every decision and are not adversely affected when sudden major events happen such as sudden medical expenses or even job loss as many have experienced over the past few months. The way I like to look at this is, having enough money to be able to say “money is not everything!” and as Warren Buffet so eloquently adds “make sure you make a lot of it before saying such nonsense”
The first action plan should always be to start saving. I will, however, take this step a bit further and say that this “saving” needs to be broken down into two parts. I would recommend creating an emergency fund i.e. simply setting some money aside in case of a rainy day. And no, that expensive phone that just came out is not an emergency! Why create one? Because everything that can go wrong will go wrong! This fund should be kept separate from bank accounts you usually use and should only be touched in case of actual emergencies.
Calculating how much should go to your emergency fund is easy at this stage, just take the minimum monthly expenses amount calculated earlier and multiply it by 3. This would be your first goal, save enough to survive for 3 months. Once you hit that number in savings, extend it to 6 months and then maybe extend it further to 12 months.
Before we tackle the second type of saving, what I would want to mention is that if you have debts, this is when you should think about attempting to pay those off earlier. The sooner you settle your debts, the less you’ll pay in interest costs and it will make you feel a lot better mentally. This includes credit card debt and not just long term loans. Try tackling the debt with the highest interest rate first and slowly move down. This would result in most savings. I would also suggest that maybe it’s time if people owe you money, start collecting them. I know that there are some of us who find it hard to ask people to pay you back but trust me, this will save you from a lot of unwanted stress at a later stage. It is not selfish, but you’re merely taking care of yourself and your family. You can do this!
The second type of saving should ideally be in the form of making an investment. I like to think of this as, creating a retirement fund. But you can, of course, create short term savings as well. The easiest way would be by creating a DPS which if taken through certain vendors can be bundled with health insurance. A DPS has tax benefits as well. There are other alternatives and depending on the amount that is available to save, you could choose different options but that’s a conversation for another day.
Finally, this whole process might sound easy on paper but practically can be hard to pull off. Try reading books on personal finance at least once a year to reset your priorities as we will surely get distracted by shiny objects. This is a long term goal that you’re trying to achieve and it won’t be easy, but stick to it. Once you have a track of how much you’re spending each month, once you differentiate between “necessities”, “nice to haves” and “Not needed”, once you create an emergency fund, pay off debts, collect everything that is due to you, have a secondary saving/retirement fund, you will safely be on your way towards financial freedom and maybe even reach the point that you can say “money is not everything”!