Having an idea about your net worth all the time and ensuring that no cash sits idle would go a long way in ensuring financial independence and peace of mind. But the challenge is how to manage it without putting in a lot of time.
Rule 1: Don’t Measure What You Don’t Want to Control
In the past I experimented with a lot of different options and came up with some time saving and easy to follow steps in personal accounting. At first I started with monitoring every expense I made, I installed an open source software called GNUCash and kept an account of almost everything from money spent on milk to drinking water. Soon I realized that it was taking a lot of time and not every information was useful. For example I would never cut back on the expenses made on food or water so what was the point? This brings us to the rule number 1.
Rule 1: Do not measure what you don’t want to control. Just knowing what your monthly expenditure would be enough.
If you do want to monitor your expenses install application like Walnut Money. It keeps a track on the expense sms you receive and categorises all your expenditure seamlessly. You can check it once a month or set an upper limit to expenses per month which should be enough.
Rule 2: Follow a 3 account system (Savings, Expense and Investment)
Next I wanted to divide my money into 3 parts, for expenses for investments and savings. I started with creating an Excel doc but it was quite confusing and needed periodic revisions and made me quite unsure if the data was correct all the time. So I came up with the following 3 account system which I later found out is the recommended way of doing it.
- Expense Account : from where I pay for day to day needs. This account is supposed to have the least amount of money and most exposure to the outside world. If you make all your expenses through credit card you can consider it as your expense account.
- Savings Account : This is where I save money for my short term needs say upto 3yrs. This account has most money but least exposure.
- Investment Account: This is where you hold the money before investing it into desired instruments.
There is an added security benefits of having 3 accounts. India’s Deposite insurer gives you an Insurance of upto 5L per account. This way you get an insurance of upto 15L as your money is not centralised at one place.
You can also save time by setting automatic monthly transfer instructions from your salary account to other 2 accounts that way by just looking at your balances in different accounts you get an idea about how much you have for what purpose. So our rule 2 is
Rule 2: Follow a 3 account system to easily categorise your money by its purpose i.e. expense, savings and investments.
Rule 3: Buy Insurance Rather Than Holding Cash for Emergencies
Even after following the 2 rules above I was worried that if I stash all my money away into non liquid forms and I need it for some emergencies, I may not be able to use my own money. I realised that if I do come across an emergency and spend all my money on it, I will still be in trouble after coming out of it. This brings us to the rule number 3.
Rule 3: Buy a health Insurance and any other insurance required even if you have one provided by your employer.
You can loose your job any time or you might have resigned and looking for a suitable job. At these instances you may not have insurance cover.
In my opinion one must never consider insurance as investments. They are a cost of buying mental peace, that if the things go south I will have enough to combat that without loosing any of my capital.
Rule 4: Hold 9 Months Expenses in Liquid Form
Now coming to the last rule, it about building a plan for big expenses like buying a Car in 3yrs, a home in 10yrs and so on. This way you will have an idea about how much money you will need and when. This helps a lot in deciding how much money you can put in different investment instrument for some of them only work over very long terms while FDs are for very short term.
Rule 4: Plan your big spends and keep at least 9 months of expenses in liquid forms.
The 9 months time is enough to switch jobs but if you are in an industry where jobs are scarce keep a higher amount of money.
You can plan for your spends on a diary (something that I prefer) or you can use Excel, don’t use an app for everything. In my opinion planning on paper exercises your brain and you tend to relate things better and remember them as well. This will help you in making faster decisions.
Let me know in the comments section if I missed any rules that you consider important.