Most of the investors really do not appreciate the importance of a household budget. The moment you sit down and document your monthly spends, you get a clear idea about whether you are overspending, whether you can cut down on expenses etc. Your financial plan is great but it is unlikely to really create value for you unless you are able to convert more of your discretionary spending into investments. In the debate of spending vs investing, it is investing that needs to win. The whole idea of the household budget is to turn spending into earning. After all a penny saved is a penny earned. When we evaluate spending money vs investing money, let us also look at how to save and invest money wisely. Just reducing expenses is not enough, putting them to productive use is important.
1. Making saving a target and expenditure residual
How do we normally create a household budget? We first budget all the expenses, then classify into urgent and deferrable expenses and whatever is left we just save that money. More often than not, this saving is just lying in a bank account and not even earning attractive returns. But, first things first! Just turn your approach around a little bit. Make your monthly investment as your target. You can go to any SIP calculator which will tell you how much you need to save to conservatively reach a target corpus in 20 years. Make that your target. Then use the residual cash to spread across your expenses.
2. Get the best deals on your discretionary spending
How does most of our discretionary spend get spent? It includes watching movies, going out to eat, spending on clothes, spending on travelling etc. Did you know that you can squeeze your outflows on each of these items? For example when you are watching movies, check out the best deals you can get through various banks and digital payment modes. You will end up saving a good deal each month. When you eat out, make the best of the plethora of discount coupons that you receive online on a regular basis. You can actually get more for less. When you are travelling or spending on clothes, make a comparison online and force the best deals. You will be surprised to learn that you can have the same level of enjoyment for much lesser price.
3. Negotiate, as a lot can happen across the table
There are a lot of budget expenses that we assume as irreversible. That is where you are mistaken. Almost everything can be negotiated if you sit across the table. From your rental payments to the landlord to the commission to your broker to the EMI on your apartment, everything can be pulled down if you insist hard enough. You can actually reduce your petrol bills substantially if you opt for shared cabs which are equally comfortable and you can even avoid having a driver to chauffeur you around. When you add up all these small items and cumulate over many years, the impact can be huge.
4. Be conservative projecting incomes, aggressive in projecting expenses
Most of us do exactly the opposite. We tend to get aggressive in projecting our hikes and bonuses and budget our expenditure accordingly. Rather assume that your income will remain stagnant and make your budget. You will be surprised to see how much you actually end up squeezing your expenditure that way. And if you actually get a liberal hike and bonus then that is icing on the cake as you can easily allocate that money to your long term investment plan. The same applies to inflation. Provide a higher inflation for your expenses and discount your investment value accordingly. If inflation ends up lower you stand to benefit. It is always better to err on the side of caution.
5. Watch your small SIPs grow to convince yourself..
The proof of the pudding lies in the eating. Sit with your financial advisor and regularly evaluate how your small savings have grown over a period of time. Let us look at some live numbers. Assume that with all these efforts you are able to save another Rs.5,000 per month. If you were to invest this money in a monthly equity fund SIP and even assuming a very conservative annual return of 12%, you will end up with a corpus of Rs.50 lakhs after 20 years. That really puts in perspective why you need to convert your discretionary spends into investments at the earliest.
6. Do a comparative analysis with back-tested data..
There is no better way to convince you than do a back testing. Let us take the example of Wipro. If you had Rs.10,000 in 1980 you would have most likely booked a Bajaj Scooter. Instead, if you had invested the money in Wipro, the small investment of Rs.10,000 would be worth (hold your breath) Rs.500 crore today. Most likely, your Bajaj Scooter must have found its way into some antique shop by now. Look at the case of Eicher Motors. The stock was available at Rs.200 in 2009. With Rs.50,000 you could have either purchased a snazzy bike or 250 shares of Eicher. At the current market price of Rs.29,000 that humble investment of Rs.50,000 would have been worth Rs.72.50 lakhs today. Such back tested examples allow you to really understand why to convert your discretionary spends into investments.