Money Smart Mom: Making smart spending and saving decisions
How could working mothers allocate money on various expenses, credit cards, benefits of a home loan, and more...
By Satish Kantheti and Aruna Raghuram
ParentCircle interviewed Satish Kantheti, director in the Hyderabad headquartered financial services company Zen Money and Chief Investment Officer at Zen Wealth Management Services. Read on for his responses on some common questions:
How does one prepare a spending plan?
Before preparing a spending plan, one should understand the difference between needs and wants:
Needs: A family’s financial needs are expenditures that are essential for all members to lead their daily lives. These are recurring expenses such as food, housing, clothing, transport, children’s education, insurance premium, loan repayment, medical expenses, gas and electricity bills, water charges, and so on.
Wants: Wants are expenses on things that help us live more comfortably, which include entertainment, eating out, travel, designer clothing and accessories, luxury cars, costly gadgets, hobby classes, and so on.
Write down all expenses under these two heads. The objective must by to spend money for needs first before fulfilling your wants. Needs and wants should also be prioritised based on the short/medium/long-term view. This helps you spend wisely, save for future financial goals, and makes planning your finances easy.
What are the factors to be kept in mind while making the monthly budget?
Making a budget helps you plan your spending and limit overspending.
- The first important factor to be considered for preparing a monthly budget is your income, i.e. the net income which includes salary, rental income, and income from financial instruments (interest, dividend income).
- The next factor is expenditure. Once you make a list of needs and wants (along with how much they cost) you get a good picture of your monthly expenses. Include even small purchases you intend to make to get a clear picture.
- After preparing the income and expenses statement, check the balance between income and expenses. If your monthly budget shows you have more expenses than income then it indicates a problem in your financial position. This would require you to reduce your expenses or identify new ways of making money to meet the expenses. To ensure that some money is saved, the expenditure must be less than the income. If expenditure is more than income, it leads to borrowing.
- While preparing the budget, consider allocating some part of your income to reach certain financial goals, be it a short, medium or long-term. Make a note of your future goals and calculate how much to allocate to meet the goals. Monitor your progress towards achieving those goals regularly. For instance, you can save a certain sum to buy a car after a year or so.
How should one allocate income between spending and saving?
It has been observed that most of us first spend money on our monthly expenses and then the leftover amount is kept aside as savings. But this is a totally wrong way of going about money management. The right way is to allocate a certain percentage of income to savings before it is spent (i.e. income – savings = expenses). Identify your financial goal, adjust for inflation, and find out how much you have to save to reach your goal in a particular time-frame. Make sure that you allocate first to meet your financial goals and manage your household or other monthly expenses with what is left.
The general rule of how one should distribute monthly income between spending and saving is the 50-20-30 rule. It means 50% of your income should go towards needs, 20% towards savings for your short, medium and long-term goals, and 30% towards fulfilling your wants.
What percentage of income should one ideally save at different ages?
The percentage of income one should ideally save depends on personal financial goals, overall financial situation, and age factor. As a general rule, a youngster at the starting point of his career aged 25 years can save up to 10% of his net income. As income increases gradually, he can increase savings up to 15% of the net income. For those between 35 to 45 years age, they can target saving a minimum of 20% of their net income and gradually increase savings to 40%.
How to allocate income on the main budget items?
The cost of living changes as per the city in which we live and also spending varies depending on individuals. Illustratively, if we consider a household income of Rs 1 lakh per month, the allocations should be:
- Rent: 20% (Rs 20,000)
Food: 18% (Rs 18,000)
- Household operations: 4% (Rs 4,000)
- Transport: 4% (Rs 4,000)
- Education: 5% (Rs 5,000)
- Medical expenses (including health insurance premium): 4% (Rs 4,000)
- Clothing: 5% (Rs 5,000)
- Entertainment and family recreation 5% (Rs 5,000)
- Loan repayment (e.g. housing loan): 15% (Rs 15,000)
- Savings: 20% (Rs 20,000). This should be invested for financial goals.
What is the best way to save for education and marriage expenses of children?
Before selecting the option, you should set targets. Estimate the amount required to meet the education needs and also to cover marriage expenses. While looking for investment instruments, you should consider two points: (i) it should offer high returns over the long-term to beat inflation; and (ii) it also should enforce financial discipline so that you do not use the corpus set aside for the children to meet any immediate expenses.
To meet children’s education expenses, which are at least 10 years away, and marriage expenses which are 15 years away, you should ensure a major allocation to equity-oriented instruments. For education, you can consider investing in equity oriented-balanced mutual funds, ULIPs (unit-linked insurance plans) and Sukanya Samruddi scheme. To meet marriage expenses, you can consider investing in diversified Equity Mutual Funds and can also allocate some portion to Gold ETFs (exchange-traded funds) or Gold Bond scheme. However, when the goal term nears, you should gradually shift from equity to fixed income instruments.
How to keep (liquid) funds for emergencies?
Creating an emergency fund that is equal to six times your monthly income is essential to meet unexpected and unplanned scenarios, and should not be used to meet your routine expenses. Instead of sitting idle in a bank account, you can park that amount in liquid funds or ultra-short-term funds or short-term recurring deposits, so as to ensure that you would be able to withdraw the money when you need it without any delay. The value of the amount should not go down either and the investment must deliver guaranteed returns. You should also ensure that you do not get penalised by an exit load or pre-withdrawal fee.
What are the pros and cons of using credit cards?
Using a credit card equals taking a loan. The spending point schemes may look attractive, but credit cards are designed in a way that make you spend more. Using credit card often indicates that you are living beyond your means. One should always keep track of how much you are spending using your credit card. Credit card debt has the potential to destroy you financially if not paid in time.
What are the benefits of taking a home loan?
As buying a house requires huge capital investment, it may be difficult to buy a home through your savings entirely. Taking a home loan makes it easier to buy your dream home and it can be repaid in easy EMIs. Taking a home loan is considered as ‘good debt’ because it is tied to a physical asset. Other benefits of home loans are:
- Housing loans have long repayment tenures, which go up to 30 years. This reduces your monthly burden
- Home loans are taken against property and are ‘secured’ loans. Such loans normally have lower interest rates compared to other kinds of loans
- By taking a loan to buy a house, you can also benefit from the rise in property prices over time
- By taking a home loan and owning a house you avoid paying rent. It is better to pay the EMIs than shell out rent
- Another major benefit of taking a home loan, is that you can avail tax benefits on the repayment of the principal amount and interest payment. Principal repayment amount of up to Rs. 1.5 lakhs is eligible for deduction U/Sec 80C. Annual interest component of up to Rs. 2 lakhs can be claimed as a deduction against income U/Sec 24. There is an additional deduction of Rs. 1.5 lakhs for interest on home loans availed for purchase of affordable houses of up to Rs. 40 lakhs till March 2020
- Owning a home and renting it out can create a second stream of income. Also, for the house that has been rented out, you can claim the entire interest paid on home loan (without any upper ceiling) against the rent received
- For the FY 2019-20 and onwards, the benefit of considering houses as self-occupied (for tax purposes) has been extended to two houses. But the deduction with respect to interest on home loans, shall be Rs 2 lakhs for both the properties taken together
This article mainly answers questions on spending and saving. Money saved has to be invested appropriately to meet short, medium and long-term financial goals. The third article in this series will focus on investment options in detail and portfolio management.
In a nutshell
- Follow the 50:20:30 thumb rule to allocate income between needs, savings and wants respectively
- In the short-term, you have to keep funds liquid for emergencies and in the long-term you need funds for children’s education and marriage expenses
- Exercise caution while using a credit card
- It is advisable to take a home loan to buy a house
What you could do right away
- Make a list of your expenses and divide the items into two categories – needs and wants
- Curb overspending and ensure you save 20% of your monthly income
- Park an amount equal to six times your monthly income in a liquid fund for emergencies
About the author:
Written by Aruna Raghuram on 12 September 2019.
Raghuram is a journalist and has worked with various newspapers, writing and editing, for two decades. She has also worked for six years with a consumer rights NGO. Presently, she is a consultant with ParentCircle.
About the expert:
Reviewed by Satish Kantheti on 12 September 2019.
He has an MBA in finance and is a CFA (chartered financial analyst) as well. With an experience of nearly 19 years, he is actively involved in investor education initiatives.
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