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If you are one among those who almost always feel broke at month ends, then you are not rare. Millions of Indians find themselves in same situation every month. They get their salaries in first week of the month and by the last week, they are almost broke.
Why is it that people have trouble managing their personal finances?
It is because most people spend their time and energy on earning more but not on saving or investing or managing their cash flows properly. If done properly, people can be smart about their savings and get on track to create a wealthy future.
The first thing to understand is that trouble starts when people follow the equation:
Income – Expenses = Savings
This means that people try to save what is left after their expenses (both discretionary and non-discretionary).
This approach should instead be corrected to the equation:
Income – Savings = Expenses
This means that when you get your income every month, first set aside money for savings and then start spending money on necessary and discretionary purchases. This ensures that you keep saving towards your life goals like retirement, children’s education, marriage, etc. A consistent and well-disciplined approach towards savings and investing goes a long way in securing your financial future.
That was about savings in particular. But how can you be smarter about the money, which you necessarily have to spend?
For that, you first need to understand the basics of personal finance like simple interest, compound interest, how interest rate affects your EMIs, total interest paid on loans, hidden costs, etc.
So suppose you are getting an option to opt for a zero-interest loan of 6 months, then you should not take it immediately. Chances are that there would be some processing fees, which will negate the benefits of zero-interest. So look out for such hidden details.
Again, there are people who use credit cards a lot and don’t clear off their dues every month. Credit cards are very costly form of loans and can cost upto 40% a year. Say no to financing through credit cards as soon as possible.
These are some ways to ensure that you are smartly managing your personal finances. There can be many other ways, which you can think of from your own experiences. Need of the hour is to spend some time thinking about how you can better manage your money.