One of the first steps you take when it comes to your personal finances is to manage your cash flows. It’s simple; if you spend more than you earn, then you are in for trouble.
This is why it is important for you to be able to track and analyse your spending and savings patterns. Creating a budget and categorising how you spend your money on a regular basis can be an eye-opener. You might realise you are spending on things which may not be a priority for you.
So, the first thing that you need to do when it comes to your finances is to create a budget. It does not need to be anything fancy. Take a notebook, jot down your income on one page, and the break-up of your expenses on the next page. If your income is higher than your expenses, you are off to a good start. If not, then start looking for places where you can create room to save. This will help you understand where your money is going.
A budget can give you an overall view of your cash flow, and help you identify the necessary and discretionary expenses. That way, you will be able to save money for investing as well as adjust your spending patterns.
There are many apps that can help you manage your cashflows. A quick Google search will throw up names like Goodbudget, Pocketguard, YNAB, Personal Capital, Clarity Money, and more. On the Play Store and iOS store on your phone, you will likely find one that best suits your needs.
However, personally, I do not use any of these. I find it difficult to manually monitor all expenses every month. I prefer automation.
When it comes to investments, systematic investment plans (SIPs) have been a great tool of automation for investors, because it automatically deducts money from the bank account every month, and the investor does not have to worry about it much. This creates a behavioural trick that forces you to allocate a certain part of your income to investments.
So, how would you implement a similar system for your expenses? Is there a way to automatically keep a lid on how much you spend every month? The answer could lie in having a separate bank account that is dedicated only to your spending. Transfer your spending budget to that account every month. If all your expenses are only debited from that account, it ensures that you stay within your self-defined limit.
Now, if you decide to spend more than what you have budgeted, you will have to transfer an extra sum to that spending account, which will give you time to think about whether that spending is necessary or not. If you are smart about it, your spending can become much lower than your income, and that will leave some extra money lying in your spending account, which can be used to pay debts, or be invested for the future.
The beauty of such a system is that it is easy to implement; it relies less on you having to manually maintain a budget every month, and it automatically keeps a cap on how much you spend. Taking this first step can go a long way in getting your cash flows in shape, and put you on a solid footing towards financial independence.
The author is founder and managing director, Kairos Capital