Do you fear running out of money despite high salary?

For all those facing this conundrum of running out of money in spite of earning well, it is time to take a second look at your money management skills. While earning a higher salary is wonderful, effective deployment of those resources goes a long way in ensuring that you do not harbour feelings of constant financial crunch.

With a few simple measures, you can make sure that you have enough financial resources at your disposal to never run out of money at any point in time. 

Keep track of income and expenses 

Keeping a check on your daily expenses might sound tedious, but it is the sure-shot way to avoid unnecessary outflows. This exercise is not intended to make you switch to a frugal life. It is just a way to make you more mindful of how you spend your money. There are several apps available for tracking your daily expenses. An analysis of the outflows at the end of each month, will help you to identify the loopholes in your budget. By taking corrective measures, you can cut out all avoidable expenses to free more resources for gainful employment. 

Project future requirements 

Identifying your monthly income and expenses provides you with the data required to successfully project your financial requirements in the years to come. There are a number of tools available online to help you predict the corpus you would need to maintain your standard of life. These tools will also help you to factor inflation and possible changes in your outflows linked with your life goals. You can also gauge the amount that you would need to retire comfortably. This awareness will act as the blueprint to plan your savings and investments in such a way that you never face financial distress. You can also take the help of a qualified financial planner to guide you in this process if you find it overwhelming. 

Always prioritise savings 

We all function on a limited income but have unlimited aspirations. We often spend our hard earned money in an unplanned way to fulfill these aspirations, which puts pressure on resources. By making a list of priorities, we can put our limited resources to the best possible use. 

Make ‘saving’ as the first to-do item on your list of priorities. As soon as you receive your salary direct a significant portion of it towards savings. Ideally, 20% of your income should be earmarked as savings. 

It is only from the remaining income that you should plan to meet all your other expenses. You may find yourself in a situation where after savings and fulfilling your unavoidable expenses like rent, bills, groceries, etc, you are left with little money for your discretionary spends like movies, shopping, dinners, etc. The best way to ensure that you indulge in these activities without feeling stretched out financially, is by chalking a calendar of your social events. If in a particular month you want to go for fancy dinners and movies, you can shift activities like shopping or weekend trips to next month. Such a calendar will help you to pursue all activities you want in a systematic manner, without putting yourself into a financial strain at any given time. 

Saving regularly is the job half done

Saving, though desirable is not the end goal. Investing your savings in growth instruments is equally crucial to building a healthy corpus of funds. As a thumb rule, allocate a percentage of funds equal to 100 minus your age to equities. Equity has historically offered around 15-16% CAGR over 15-20 year time period and is the best investment tool for medium- to long-term goals. You can also explore the mutual funds route to participate in equities. This will help you to avail benefits of diversification, while ensuring that your funds are not tied up in sub-optimal instruments like gold. For short-term needs, you can opt for liquid/debt instruments and fixed deposits. Sound investments ensure that your money works for you and complements your income to amass sufficient resources for fulfilling all your goals. 

Make the magic of compounding work for you

SIP option has made it possible for investors to bring the much-needed discipline in their approach towards investment, while making the magic of compounding work in their favor. If you make a small SIP of Rs 1,000 per month in an equity MF that offers about 12% annual returns, you will have a corpus of Rs 35.3 lakh at the end 30 years. Thus, adopting the SIP route for investing in MFs and equities can work wonder for your financial portfolio. Even if you are earnings are not substantial, just by starting a SIP early on, you can accumulate huge wealth over a long-term period to ease financial pressures. 

Build a separate fund for emergencies 

Any emergency can act as a huge drain on your resources, making you feel financially constrained. But if you build a contingency fund, which is separate from your savings and investments, you will have a comfortable cushion to tide over any such situation should it arise. This fund should, ideally, have enough money to sustain you for at least three months, even if there are no inflows. To build a contingency fund, give an auto instruction to direct a certain sum from your salary account every month to a recurring deposit, which will lock in your money for a fixed time frame. You can also invest in instruments such as short-term debt funds or liquid funds to earn higher returns without compromising on liquidity. 

The writer is MD & CEO, Axis Securities