What does your “financial snap shot” look like? Check it out !

What does your “financial snap shot” look like? Check it out !

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Hopefully, you have taken that all important “Single Step” from where I left you last time. If YES, it would mean that, you have filled in the  “Budgeting 101.1 Worksheets”

  • Income & Expenditure Sheet and
  • Net worth Sheet

Despite the drudgery involved, patient budgeting is the only way to come up with a viable Life Plan because “resources are scarce and need to be allocated wisely”. This is as much true for personal households as it is for countries, corporations, businesses – Fiscal profligacy can only lead to fiscal ruin.

Budgeting is the only way you can identify wastage, saving opportunities and; appreciate costs verses benefits of the money you spend, Life Goal priorities and also avoid the dreaded debt trap.

Budgeting is therefore, the very foundation on which your Life Plan will get built.

Well, let me at this stage caution you against striving for perfection. Not that it’s a bad thing but it can prove futile in the budgeting process. What is important is to begin!

It’s best to make this a joint effort with your spouse (that is if you already have one) because not only will such a budget gain equal ownership but “two heads work better than one” . If  fortunate , you may even find yourself a mentor in someone who having seen life closely is willing to let you benefit from his/her experiences, wins and failures.

Your budget will almost certainly get updated by various items popping up as the year trudges along ( Hence in my view a +/- 10% tolerance is quite acceptable to begin with).

The only way to manage that uncertainty so embedded in our future, is to ensure that, the above statements are during the first year, reviewed every ‘salary day’ and then on updated every year after you have filed your Income Tax Returns.

As I had mentioned in the earlier feature Click here to read “Saving is more difficult than investing” ; personally, I have always found it convenient to manage my financial activity around the Income Tax Calendar (Advance Tax, Self-Assessment, Return Filing, etc.).

I strongly believe that, every young person starting off in life should “target” to save at least 30% of their  “Take Home Pay” (and to begin with at least begin with 15% – however small that may be)

Whilst salaried folks can get a fix on their income easily; it could prove a little difficult for those in business or profession to estimate income – assuming all things equal, it may be prudent for them to work on averages of past years – suitably adjusted for month on month and even year on year trends based on their appreciation of business cycles.

Personal finance has (for good reason) over the past few years evolved as a hot spot for popular media – print, web and even radio. It’s hard to miss the many surveys on household consumer expenses and recommended spending limits for each expense head. Whilst these surveys provide us with good benchmarks there can never be “one jacket that fits all”. Its therefore important for each one of us to introspect and personalize our budgets.

We have to first understand our relationship with money

“…we don’t necessarily realize what money means to our deepest imaginations. It might mean status, security, success, revenge, salvation, moral superiority or guilt (to start the list). These are all huge themes in life that get caught up with and played out in our relationship with money…”

says John Armstrong in his book “How to Worry Less About Money” .

It is therefore, critical that, we work hard at understanding ourselves and realize what is important to us because, it is that which will define our relationship with money – how and why we spend or save (and even invest) it the way we do.

Nothing explains our motivation to spend money better than Maslow’s Hierarchy of needs.

The majority of us normal folk, begin at the bottom of his pyramid and gradually work our way to the top. It is reasonable to expect that, for most like us, it may take a good part of our earlier working life to satisfy the needs in the bottom two slivers.

Maslow provides us with an excellent conceptual framework to be used when we frame our Life Goals (to be discussed later).   

Humans are by nature aspirational, social beings and therefore, cannot restrict themselves only to “Roti Kapda aur Makan” – which explains why not all what we spend necessarily goes to satisfy our “basic needs” or “essentials” . Some of our money is bound to be spent on lesser needs and the rest on even satisfying ‘wants’ (which for some could be deceptively seem like ‘needs’ !).

The Maslow ladder therefore, indicates the aspirational path of most ‘normal’ people. In my view, there are only three types of people who can avoid it (i) those in search of spiritual goals who go directly from ‘physiological’ to ‘self actualization’  (ii) those fortunate few born with a ‘silver spoon’ and (iii) (knowingly or not) those deluded or indulging in self deception . The rest of us would be well advised to “take charge of our lives” early on.

So, now the answer to – Where am I now?

To assist you in answering that question for yourselves, I have added a new sheet called “My Financial Picture”; to the Budgeting 101.1 worksheet provided in my earlier write up Click here to see the earlier feature . The metrics should get calculated after you update the earlier two sheets (with the information you should hopefully have put together by now).

Let’s get familiar with some of the simple metrics (sorry can’t completely avoid them !) generally used by professional financial advisors to draft your report.

 
Income Surplus

as % of

Total Core Income

(i.e. Your Take Home Pay + Bonus)

10

to

50

Higher the better – the only way the vast majority of us can get rich (if at all) is by spending less. However, a balance has to be achieved so that, you don’t end up craving for the basics matching your place in the environment which you live in. The trick is to distinguish between your “needs” (essentials) and “wants” (not essentials). This has to be a personal journey of discovery for you.
Earning Assets

as % of

Total Assets

40

to

60

Higher the better“Earning Assets” are those which earn for you and  unencumbered to be allocated to your Life Goals. It therefore, follows that, the assets in personal use e.g. the house you live in, the car you use; are not earning assets. The conclusions one draws from this ratio should depend on your age and the life stage you are in because; in your early life when you are building assets, this is ratio could be low.

I would expect that; this ratio would continually improve with your age and because you are increasing savings, minimizing debt and maximizing earning potential.

Non-Earning Assets

as % of

Total Assets

40

to

60

This is the opposite of the above ratio. Lower the better
Liquid Assets

as % of

Monthly Income Surplus

6

to

12

Higher the better – because having ready access to liquidity (to a reasonable extent!) is the most important requisite for a good Life Plan.
Total Liabilities

as % of

Total Assets

Less than

35

Lower the better – One is generally asset acquisitive, earlier in working life.

I would expect that; this ratio would continually improve with your age and as you will progress to a “debt free” situation.

Total EMIs

as % of

Your Take Home Pay

Less than

50

Lower the better – As in the case of the above ratio, even this one should improve as you progress in life. However, its components are also important because the way you manage your debt will go a long way in determination of your “Credit Scores” and whether the banks will consider you good enough risk for getting loans.

The breakup of your total EMIs has to meet the following limits:

Home Loan – Should be less than 25% of ‘Take Home Pay’ (Please remember that, home loan EMIs and rent are mutually exclusive)

Car (Vehicle) Loan – Should be less than 15% of ‘Take Home Pay’

Personal Loans (incl. Credit Cards) – Should be less than 10% of ‘Take Home Pay’.

Personally, I rank the above loans in reducing preference because, whilst I believe one should completely avoid personal loans and borrowing on credit cards; I have taken a home loan before a car loan. It would have been much easier now with Uber, Ola, etc.

Even Banks would not mind taking home loan EMIs up to even 40% of ‘Take Home Pay’ provided, the overall EMIs stay within 50% of your ‘Take Home Pay’.

You should be very wary of borrowing money because, when in a tight spot, we will sadly, end up compromising on our (possible the most important) Retirement Goals .

     

 

SECTION 2:

Given below are broad standards (%) of how a typical urban, double income, educated and employed Indian household spends. Obviously, those with lesser income, especially those beginning life after completing their education will have little to spare for anything beyond that required for “needs”. However, I would still urge them to inculcate the discipline of “budgeting” and confronting the challenge of building a formal “Life Plan” so that, they are in a state of readiness when they have progressed to a better place in their professional lives.

Your Take Home Pay

(Full Year)

100

This is the salary you get in hand after deduction of provident fund, etc. and income tax.

I am not sure if you have noticed, that, BONUS has not been included. This is because, I strongly believe that, all windfalls and bonuses should be kept aside – either for your retirement goal or to repay your debt.

“Controllable’ Expenses

(Full Year)

20

These would usually be considered “wants” (differentiated from needs) and referred to as “discretionary expenses” because you are expected to use your “discretion” to evaluate their cost/benefits and decide if you should spend that money at all.

These expenses would obviously not be part of the bottom two segments in Maslow’s hierarchy of needs. This should therefore, be your first hunting ground when looking for savings.

I would not  spend on holidays except after I have planned and saved for them in advance. Compromising on long term goals, especially retirement is a very common financial ailment.

“Not Controllable” Expenses

(Full Year)

50

These are those expenses which come in the bottom two categories in Maslow’s hierarchy – These would be called “needs”Saving on these would cause some serious inconvenience to your life and of those in your family.
Total Expenses

70

Controllable + Not Controllable Expenses
Total EMIs (Full Year)

??

This is the aggregate of all the EMIs demanded from you in the full year
Income Surplus

30

I strongly believe that, we should (not merely target) save at least 30% of our “Take Home Pay”. 

Young people just starting off in life should put aside at least 15% – however small that amount may seem!  I can assure you that, the “Opportunity Cost for delaying your savings plan” will more than make up for all the pains, worth taking. 

Therefore, in those early years, its better to “rough it up” and save as much as you (avoid the pubs and restaurants) can but at least 15% ( in addition to bonus) of your yearly take home pay.

If there is one rule which you should never break is to always save all windfalls (e.g. wedding presents, prizes, birthday presents, etc.), inheritances and employer bonuses; however small they may seem..

The earlier you develop a “Life Plan” with “SMART Goals” – begin accumulating & investing funds against each of them – bigger  will be the boost to your financial security and confidence when facing professional challenges.

 

SECTION 3:

Here is another set of “guidelines” or limits for the money you spend on some of your “needs”; which could help you identify savings opportunities. You will undoubtedly appreciate that; these percentages will drop as your income increases – which should mean you have more disposable income.

YOUR

TAKE HOME PAY

100
Food & Groceries 20
Healthcare
( incl. medical insurance)
4
Term Life insurance 3
Housing (with Rent) 20
Utilities 4
Education 6
Transport 8
  • Budgeting is a very personal exercise and making of a comprehensive budget demands quality “me-time” for some serious introspection. Getting to know yourself better is key. Understanding the environment you lived in the past (e.g why did your parents take some of the financial decisions they took) and do in the present (e.g can you really afford to buy that fancy car you are aspiring for ?), will lead you into envisioning a realistic future for yourself and your loved ones. Remember, answers cannot be found by blaming others for the way your life is; but only by recognizing what needs to be done (by you) in order to achieve your (realistic) life goals. As the Bhagvad Gita says “The most important are not the battles we fight with others but are those we fight with our self”It should therefore hardly come as a surprise that we come across  so many around us who despite having made an excellent budget, can never adhere to it.

 

  • Your budget is never done with – because the future will always throw up surprises (both good and not so good ones) – so keep “it in pencil” to enable you review and adjust it; so as to keep your Life Plan, Goals, Investment Policy and underlying assumptions, in line with your changing life conditions as a result of the progress you make in your personal and professional life. During the first year – review your budget every salary day – balance the books as the accountants would say! Later it should suffice to do it once a year – ideally after you have filed your income tax returns. Click here : Planning for the Future knowing that it is uncertain  

Click here: to download the UPGRADED Budgeting 101.2 (worksheets)

You have to input (into 101.2) the information you have already put together in the older worksheets (101.1).

In this upgraded worksheet (101.2), I have provided you with (i) Your “Financial Picture”, the foundation for your “Goal based Life Plan” (ii) Asset & Liabilities List (of course add those I may have missed) and (iii) List of Insurance Policies. 

No one can plan and budget for you better than what you can.

Remember if there is one asset you should be investing in – its you – yourself; by acquiring the knowledge and skills to manage your own financial affairs or at least “ask the correct questions” and recognize those answers which are in your best interest.

The formats have been left ‘unlocked’ so that, you can change them to suit your specific needs. However, let me caution you that, before you decide to violate those limits, you better convince yourself with solid reasons for doing so.

 So go ahead and take the Second Step    …………………………………………………………………………………………

 

(i) Why and how you should automate the “savings process” (ii) Why you should create a “Contingency Fund” and how you should invest it and (iii) How to manage those dreaded “month end” liquidity shortfalls.

However, before that, I would like to dwell on the “The Magic of Compounding”. Its conceptually simple , easy to practice (thanks to Excel) and its knowledge will give you, both power and confidence to negotiate most (not all) curved balls which could come your way from those persistent sales persons (may they be peddling cars, real estate, mortgages, car loans, etc.)!


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One Reply to “What does your “financial snap shot” look like? Check it out !”

  1. Appreciate your effort in putting in details in excel. This is helpful. I do have created something in excel for assets, investments but expenses part was not well thought of. Thanks for sharing.

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