Last Updated on November 25, 2021 by Admin
In today’s time it is very much important to do money management and post COVID-19 scenario throughout the world forced everybody to plan and manage money in proper way to create more value to hard-earned money. Before we discuss much about money management, let’s first understand that what is the meaning of money management in very simple terms.
Money management is basically a process or an art of getting maximum out of maximum value for our money by taking appropriate steps, measures, controls while spending money in our day-to-day life and while investing balance money (net savings after monthly expenses) in few saving schemes to earn interest on it so we can create some more value to our money in smart way.
As we all know that money plays very very important role in our life and we do hard work to make more and more money. But did you ever think that beside earning money it is also very important to do proper money management so we keep growing it more and more month by month and not to face cash crunch position while not earning actively due to some unavoidable situations in future.
Let’s take an example of two friends like one is Rohan and another is Suresh, and we can see financial position of both friends as follows:
|Yearly earnings||Rs.10 Lac||Rs.10 Lac|
|Yearly expenses||Rs.9 Lac||Rs.7 Lac|
|Net saving at the end of the year||Rs.1 Lac||Rs.3 Lac|
In above case although earnings of both Rohan and Suresh are same as ten lac rupees in a year but after all expenses Rohan is able to save one lac rupees while Suresh is saving three lac rupees at the end of the year.
Difference in savings of both friends comes to 2 lac rupees as Suresh is able to save more money than Rohan, this is because Suresh is doing money management due to which he is able to save more money for future which he invest and earn extra income on this saving of money which will lead Suresh to build more wealth in future than of Rohan.
So if we are good in money management then we can create wealth and even survive for long time without active/regular income from our business or profession as we can pay off our fixed monthly expenses out of saved money without taking much financial stress and we can easily manage future emergency needs and contingencies.
We should learn lesson from wealthiest personalities like Mr. Bill Gates and Mr. Warren Buffett. They are not rich because they earn more but they are rich because they save their more money and do investments.
Steps involved in money management
Let’s now discuss about steps involved in money management. First and foremost principle of money management is to know about our earnings and expenses for the month and then how much amount is left after spending money.
To know that, it is better to prepare cash flow statement for a month which will give an idea about the cash/bank position at the end of the month and based on that we can plan things in better way alike in business or corporates there is process of budgeting & forecasting, then based on that proper financial planning is done and adequate steps are taken for best outcome of value for money. This is called financial management in business terms.
To make it very simple, you may start noting down your day to day expenses and then after a month you can prepare cash flow statement in a very simple format.
Here is tentative format of the same which you can use. However, you can make changes or modify this format based on your various components of cash inflow and cash outflow as per your requirement.
Format for cash flow statement:
|Cash inflow during the month: –||Amount|
|Monthly receipt from salary/net profit from business/profession (after all business expenses)||xxxx|
|Receipts from other sources of income||xxxx|
|Total of cash inflow during the month (A):||xxxx|
|Cash outflow during the month: –|
|Monthly grocery/kitchen & household expenses||xxxx|
|Monthly entertainment/restaurant/food expense||xxxx|
|Monthly festivals, hotels & travel expense||xxxx|
|Monthly personal care, clothing and shopping exp.||xxxx|
|Monthly mobile, internet, electricity or other charges||xxxx|
|Monthly health & medical expenses, if any||xxxx|
|Monthly children education & care expenses||xxxx|
|Monthly fixed investments or savings if any, like LIC premium, RD, SIPs or any other saving plans already going on from previous months/years||xxxx|
|Any EMIs for personal loan, home loan or any other loan||xxxx|
|Any other expenses you are doing then you can add||xxxx|
|Total of all above expenses i.e. total cash outflow during the month (B):||xxxx|
|Net bank/cash balance in hand at the end of month (A-B):||xxxx|
If you do above exercise for a month, then you will be able to see what net cash/bank balance position you are left with at the end of the month. There is no thumb rule of what percentage of your total earning you should be able to save at the end of month but it is recommended that minimum 30% of your earning should be kept for future savings which means if you are earning Rs.100/- then Rs.30/- should be saved after using Rs.70/- on expenses.
If are able to save minimum of 30% of your earning then it may show good sign of money management. You can set your own goal about how much amount of money you want to save from your monthly earnings.
Analysis of monthly expenses:
Next step is to analyze your monthly expenses on which you usually spend your money and then to categorize those expenses in different categories. You can make separate categories like one category for essentials or fixed expenses which can not be avoided and those are recurring or repeated expenses every month & other categories for variable(non-fixed) expenses.
For example, children school fee, tuition fee, electricity/mobile/internet charges, loan EMIs etc. are fixed type of expenses. Variable (non-fixed) expenses are like entertainment, fast food/restaurant, travels & hotel expenses which are not recurring in nature and may vary month to month depending upon different occasions and festivals etc.
There is little scope of cost cutting in fixed nature of expenses and we do not have much control on them. It is always better to pay more attention to non-fixed expenses which are variable in nature and we can fix a target for cost cutting i.e. reducing or avoiding those expenses which are not essential or important for us and where we are over spending money.
I am sure once you will do above exercise of preparing your cash flow statement and start analyzing your monthly fixed and non-fixed expenses then you will be able to cut relevant cost on your non-essential expenses and will save handsome amount of money every month.
Based on your monthly expenses, you should fix your own target that how much cost you want to reduce or control like 5%, 10% or 20% and so on.
Budgeting, cost control and further steps to save money:
Next step is to do budgeting of expenses for the rest of the months for better control on spending money which will help to save more cash in future months. Best way is to go by this formula that if Income is 100/- then deduct 30/- for saving first and balance Rs.70/- left should be used for expenses.
This way we can pre-decide that we have to save 30% or any other amount which you wish to save then it will become very easy to spend money on expenses according to monthly fixed budget. It is important to develop habit of spending money as per the fixed budget to achieve desired saving of money every month.
Next step is to see options that how can we buy goods and required items on cheap and best price so we get right value for our money and for that we should follow below steps: –
- Always look for best discounts, offers, gifts & other schemes etc. while buying or shopping anything, there is lot of competition in the market and if you do little search then you can get benefit of cheap and best price for products you buy from the market. Hence it will give right value for your money.
- Try to buy products once in a month and bulk because when we buy goods in bulk, we usually get low price as compared to single product which help saving in money.
- Use your negotiation skill when you buy products from open/local market where you feel that vendor usually quote high price and then they may agree to sell on low price to you, if you have good negotiation skills then definitely you can save lot of money and bring the monthly budget down.
- Keep exploring new market for shopping because usually in the new market, shopkeepers/stores keep their price low as compared to established market to grab more and more customers in new market. They keep offering good schemes/offers and discounts when new customers visit to their shops/stores. So you can get benefit out of this if keep yourself aware of newly opened stores/shops nearby you.
- Avoid buying unwanted products, sometimes departmental stores launch such schemes and offers where they encourage customers to buy more/bulk products and some unwanted products to get huge discounts etc. At that time, you should apply your own mind whether those offers or schemes are beneficial to you or not otherwise you may lose money for unnecessary things.
- Using credit cards rather than paying cash or payment directly from your bank accounts for expenses can also save your money because it postpones the actual payment to next month by using credit period available on your credit card.
For example, if you pay any expense through credit card today then actual payment of that expense will be due in future when credit card statement will be generated so that way you may not lose interest income on your money.
Even you can also earn some points on credit cards while doing shopping etc. which can be redeemed in due course. But you should use credit cards very carefully and pay them before due dates otherwise they charge heavy interest and penalty on late payments etc.
Developing a habit of Investing your savings in right schemes to get maximum return on the same:
Money which is lying in your bank account will not grow or generate extra income until and unless you invest the same. Investing money on regular basis in the right schemes at right time and then getting maximum return on those investments is the outcome of the adequate money management.
If we are able to save maximum money from monthly expenses according to desired budget fixed by us and thereafter if we are successful in investing that money into right schemes and earning extra income on those investments then it is confirmed that objective of money management is achieved.
There are lots of investment schemes/options available now days. People normally prefer to invest in safe and secure traditional schemes like bank fixed deposits, recurring deposits, PPF, LIC, post office saving schemes, bonds, gold etc.
Some people do investment in share market, mutual funds, crypto currencies like Bitcoin etc. where risk is high and return on investment is also high as compared to traditional saving schemes.
Higher the risk and higher the return you will get as per the general principle of money investment. It is always better to consult with some financial advisor or an investment expert of your trust to decide which investment option or scheme is suitable to you based on your own financial goals.
Whatever be your decision to invest your money in those schemes, we would say that please take those decisions very carefully because money is yours, risk is yours and profit and lose on those investments will be yours.
Recapping the topic of money management, here are the important ingredients of money management in simple pointwise summary below:
- Note down your monthly earnings and expenses
- Prepare a cash flow statement just to know that where you stand in terms of net saving in month
- Do analysis of your monthly expenses and categorize them to fixed and non-fixed expenses
- Pay special attention to non-fixed (variable expenses) and see where is the scope of cost cutting and which unwanted expenses may be avoided in future
- Make expenses budget for future months after deciding your target of money saving every month
- To control and achieve your monthly expense budget, please take some smart steps while spending money like grab best offers, discounts, bulk buy, use good negotiation skills for true value of your money, explore new market, avoid buying unnecessary products
- Use of credit cards to use the payment credit period and earn extra points
- Developing a habit of Investing money on regular basis in good schemes to earn extra income on it.
- Take expert advice of your financial advisor before investing your money in Mutual funds, Stock market or Cryptocurrencies.
We wish you all the very best and we hope that this article has helped and encouraged you for doing money management so you can achieve your financial goals in future.
Please share your views about this article in comment section or by sending your message in contact form available at Contact page on our website www.moneyvalue365.com
CA. RK Dhiman
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