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We work hard for money (can’t deny that). After all, money is necessary. But I regularly come across people, who inspite of working very hard to increase their income, pay very little attention to making their money work hard.
Statements like ‘making your money work harder’ seem text-bookish. But fact is that this is what holds the key to a wealthier life.
As for me, I am ruthless. I seriously cannot see my money relax. Though I can let myself relax (a lot). 🙂
I was recently talking to a 35-something client about his finances. He earns around 80K a month. Has reasonably low expenses and is extremely risk-averse. And if we ignore his EPF balance, he has almost 70% of his money parked in savings accounts (earning just about 4 to 5%)! Ofcourse there are things like risk appetite. And this person is quite risk-averse. But at the cost of not meeting his financial goals in future, he has adopted a riskless strategy.
Is not achieving your financial goals not a risk? I think it is quite a big risk.
But even before you can put your money to work harder, you need to know what exactly it is upto?
You already know where your money comes from (mostly salary or business income). But do you really know where it is going?
Tracking (& then Controlling) Your Expenses
One of the best financial books ever – The Richest Man in Babylon says:
‘Control thy expenditures’
And this is one of the golden rules of personal finance management. Spend less than what you earn and you will be fine. And bigger the gap between your earnings and spending, better it is. But you can only control something if you know (or track) it. Isn’t it?
This is the reason that tracking expenses is important – atleast for sometime.
Once you are able to track and analyze your expenses, you will be in a position to uncover money leaks. This knowledge in itself can help you better allocate your money (towards either spending on better things/experiences or your important financial goals).
Now by tracking, I am not asking you to track every rupee spent.
Its impossible and useless to do that. But you should be in a position to tell the broad heads, where your money is going every month.
Young people often find it very difficult to save in initial years of their careers. They spend and spend and spend…..and spend. 🙂
Even I have done it in past.
But when I realized my mistake, I started tracking my expenses. At that time, there were no mobile expense manager apps. So what I used do was to record my expenses regularly in an expense tracker excel. After some time, I created a comprehensive monthly budget excel. The idea was to try and find patterns in my spending behaviour. And I swear it helped me a lot.
But most people don’t want to spend time on excel doing that. And that might be one of the possible reasons why most of them find it hard to manage or track their household expenses.
But technology has made it very easy to track expenses now. There are so many expense-tracking apps and portals to help you do that. Some of these apps are made especially for expense management like Wealthpack and can automatically track and categorize your expenses, alert you when you are about to exceed your personal budget or even specific category budget, remind you to pay bills and what not…
Now tracking for just a month won’t be of much help. You need to do it for a few months atleast to see real patterns.
Why? Because its possible that in one month (when you start tracking), an unexpectedly large expense of car repair comes up. This ofcourse is a rare event and not a recurring one. So tracking expenses for few months helps in real pattern recognition.
You might not consider tracking expenses as a wise use of your time.
But believe me that when you check the data after few months, you will see clear patterns. You will realize that expenses that you considered necessary were actually discretionary. Even the desires which you thought were your own were someone else’s. 🙂
Recently, I rationalized the number of phones and mobiles we have in our house (we live in a joint family). That small effort in itself has reduced our annual expenses by several thousands.
So unless you track something, you won’t know whether something is wrong or not. That was about not letting your money go waste.
But how do you make it work hard(er)?
Making Your Money (Actually) Work Hard
Now you understand that bigger the difference between income and expenses, better it is. Once that is set, be wise enough to park this difference properly every month according to your financial goals.
Those who are rich understand the game of money. Their money is their asset and it should work hard for them in the same way as they work hard to earn it.
And they make sure that almost all of their money is working hard for them. It is not just lying in low-yield instruments doing nothing.
That is how rich become rich in most cases.
And taking advantage of the right financial opportunities and knowing how money actually works, makes them even richer. 😉
Many people avoid investing in stock markets (even indirectly) as they risk losing money.
But it is wrong to label risky investments as good or bad. We just have to find a balance between our tolerance for risk and reward (that is needed to achieve our goals).
Like this client of mine, young people should have enormous tolerance for risk. They can take risks that they won’t be able to take later on. And if they are sensible in their financial decision making, the higher risk they take can translate into dramatically higher returns.
Once the liquidity needs (how much you need and when you need) is estimated, its your responsibility to park the remaining money in best possible instruments.
Money is your employee that can work nonstop 24/7.
So make money work hard. Very hard. Make it sweat! Stock markets are volatile. But in long term, the trajectory has been up and will continue to remain up as the Indian economy will continue growing for decades. Take benefit of that.
Another problem with people is that they are ready to take wrong advice from agents who will miss-sell financial products. But the same people will avoid talking to real investment advisors who can give unbiased advice, just because they think that the advice is not worth its cost.
But like physical health, even financial health can be negatively effected by wrong advice. So as the chief financial officer (CFO) of your life, its your responsibility to:
- Increase your income. So you have more money to invest + save (and not just spend). Ofcourse don’t sacrifice health and family in your pursuit to earn more.
- Track your expenses – There are many ways to do it now – easiest is to install some personal finance apps on your mobiles.
- Control you expenses (don’t strangulate yourself for spending every rupee but be rational).
- Put as much money as you can to work as fast as possible.
- Ensure you invest consistently. It is almost as important as investing early.
- Ensure that money is working hard in asset classes that earn high rates of returns without taking unnecessary risks.
Once money is put in the right place, it creates a small snowball. Once that money starts to generate ‘good’ returns, that amount will be added to your savings and start generating its own returns. This extra income is what will make the original ball of savings even bigger. This is how the small snowball will start getting bigger. And as Alice Schroeder says in Warren Buffett’s biography The Snowball:
What you do when you are young (and as you use time over your life) can have an exponential effect so that if you are thoughtful about it, you can really have powerful results later, if you want to.
So do a self-audit and see whether your expenses are optimized or not? It might mean that you need to record expenses in say – an expense tracker excel or some expense manager app. Do it. Spend atleast an hour every month reviewing your expenses and account / card statements. It is worth the effort.
This exercise will also help you answer the question – Whether my money is working hard or not? Or whether my money is even working for me or not. 😉
If its not, you are not helping yourself.
Be ruthless – take control of your personal finances before its too late. Take help if necessary. Create a good financial plan that can put you back on track to a financially solid and wealthy life.
And as Jonathan Clement says
The goal isn’t to become the richest family in town. Rather, the goal is to have enough to lead the life we want.