How to reduce your monthly expense?

I recently got a stealthy email from my a very good buddy. The content of the email was crisp asking me for some 15,000 Rs, he was short this month and needed to pay-back someone. I helped him out, but it got me thinking why he got himself into such a situation. He is earning decently (I would imagine around 20 Lakh PA), do not have any family responsibilities (all his sisters are married off) and just has one kid.

As per me, this is definitely not a good sign when you have to borrow from your friends. I am not against borrowing money, after all  friends are for helping you out, but it should be for a genuine reason.

Why so many educated people fail to manage their personal finance?

The single underlying principle for managing money is

Make your expenses lesser than your income

Is this so difficult to understand, that to save money, your expenses should be less than what your earn.  Yet, I find so many people struggling to maintain this equation, eventually letting themselves buried into debt.

So how exactly we should implement this in our daily life? How to spend less and save more? How to reduce expenses? The answer lies in getting into “good financial habits”. If you are single, you need to develop these into yourself, if you are married you need to share these thoughts with your spouse and inculcate these within both the partners. It is more difficult with kids, if you have any, but once these become part of your family, it will go a long way in helping your children in their lifetime.

Here are some great techniques to reduce your expenses:

• Start on 1st day of the month and every night note down all the money you spent that day. You can do it as a combined list of family (preferable) or you can do it separately for each family member. I assure you that this is extremely painful to start with since it wont bring any immediate relief but do it diligently without fail. Note down every detail of what you spent through cash, credit card, online purchase or any other mechanism. Also note down the channel you are paying through. You can use some software on your desktop or mobile to keep track of you expenses or use just a plain paper

                  You can also use application like this for iPhone

• Once you have this list (the hard-work has to give you some benefit) ready, then it is the time to walk through it and arrange the items in following categories
  • Must-Haves like rent, electricity bills, food bills
  • Emergency Purchases like medicines,
  • Casual/Impulsive Purchases like clothing, mobile phones, books, eating out etc
  • Social purchases like gifts
  • Useless purchases
• Then, go through these monthly bills or recurring expenses and see if there is something that you really need. For example do you really need to buy these costly books every month or you could just subscribe to a near-by library in your locality. I have actually reduced these expenses in my budget (I am a voracious reader). I used to buy books/novels worth more than 20K per year, this is exorbitant (not only in terms of buying but also in terms to keeping them, I spend more when I have to relocate since these books make those so many extra cartons). So I joined one of the local libraries and I have reduced by expenses to mere 1K per year along with gaining immense variety of books. There are hundreds of such expenses that you can cut-down without sacrificing your living standards or the returns in terms of value that you are getting.
• Some of the expenses can be saved just by tweaking your daily habits. You would be amazed that simple habits like switching off lights, fans or chargers can provide significant savings. We did that by switching off chargers or TV switch (not just switching off from the remote, but actual switch). These have given me a saving of as much as 100 Rs per month on my electricity bills (i.e. 1200 Rs per year). It may sound like too much pain for saving such miniscule amount, but think of it as serving to the society, doing this in the larger interest of the country. You can install CFLs instead of those big bright tube-lights or don’t run those geysers only when needed and not for long period. These are non-renewable energy and such saving by millions of people can be simply huge.
• One of most effective tip that I use consistently is to store my all credit cards in least accessible places like in the locker or a suitcase which is stashed away. The idea is not to keep credit cards at places where you can quickly pick up before going to a shopping mall. I also have a credit card with a credit limit of not more than 10K, this helps me to gain the real advantage of credit card (use it to so that you don’t need to keep the cash with you and useful during emergencies). So why keep those other credit cards with huge credit limits? Well they would be useful when I want to travel or for making those big purchases so that I can convert them into equated monthly installments with a small fee or to get those discounts at specific services (e.g. I get one ticket free when I buy two movie tickets on a ICICI platinum cards in PVR cinemas).
• Never buy on impulse, one of most crucial principle for money saving. The entire idea of those glitzy shopping malls and front displays is to attract the consumer and make him buy impulsively. Some people justify that impulsive buying is good sometime since you can get good bargains. I absolutely dis-agree, impulsive buying can never be good. What is the definition of impulsive buying:

An impulse purchase or impulse buy is an unplanned or otherwise spontaneous purchase. This can metamorphise into a serious disease.

• So if the purchase was not planned, it means the consumer actually do not need it and hence even if the product is free, it is a bad bargain. So it brings to another point is that when-ever you go on shopping make a list of items that you intend to buy and just stick to it. No additional purchases should be made even when it is so much necessary (it will automatically inculcate better habit of planning ahead more carefully for the next trip)
• I recently got invited to a birthday bash of a 1 year kid from my neighborhood. I was totally amused that how a 1 year kid would know at-all the difference between a small @ home birthday party vis-a-vis a lavish party in a fancy restaurant. It was an absolute useless expenditure and it was coming from the urge to show-off (I have loads of money or I care for my child etc etc) rather than a genuine focus on the child. I would rather invite only kids with their mothers in a small party at home, since seeing so many kids playing around will probably be more entertaining for the kid.
• Un-clutter your house, because clutter saps energy and money. Christopher Lowell says “Clutter is dandruff on the shoulders of your room”, so don’t give excuses for not de-cluttering your life. You need to get rid of “can’t-get-rid-of-that-because-it’s-valuable” gene, it is so harmful. check out this 9 Tips for Decluttering (Zen Habits)
• It is important to give up those harmful habits like cigarettes, alcohol or drugs. These not only save money in short-term, it also saves money in long-term by improving your health and reducing medical bills over the years. Invest that in a gym or personal improvement programs.

At every step in your life, while dealing with money, keep in mind that “Expenses have to be lower than what you earn”, and even after so many efforts in reducing your expenses you are hitting the debt, then it is time to look for earning more. That would be of-course another post.