If someone asks you the question what’s your savings rate do you have an answer? What if someone asked you what your fixed monthly expenses are? OR if someone asked you what your net worth is? They sound like simple questions, but you’ll be surprised by the blank stare you’ll get from most people. Like we’ve discussed previously, this is partly due to our fear of anything related to money. And partly our lack of exposure or training on manging money. When it comes to money, a lot of us behave like an ostrich and bury our heads in the sand. As long as our hairs not on fire, we are fine with living life as is. But eventually when our money problems get snowball into something so large that we have to sit up and face them its already too late.
A simple rule we learnt in management is you can’t manage what you don’t measure. The same rule applies to our finances as well. If you don’t measure your spending, you can’t manage it. Similarly, if you don’t measure your savings you can’t manage them. When I started out on this journey. I was terrified of measuring either of the above. Both spending and saving. But even more I was terrified of measuring net worth. So where do we start? what are these numbers that we need to measure? How do we measure them? How often do we measure them? Well, read on to find out.
1. Savings rate:
This number basically tells you how much of your income you are saving. It’s really simple. It’s like calculating the mileage of your car. Take your current savings balance, subtract your previous months savings balance and divide by your monthly income Lets take an example and do the math
A month back you had savings of 40,000. Your monthly income is 20,000. Say your current savings are 50,000.
Then Your Savings Rate (SR)= (Current Savings – Previous months savings) divided by monthly income
SR= (50000-40000)/20000 = 10000/20000= 0.5
Converted into Percentage that 0.5*100 =50%
So if your SR is anything close to 0% you are living on borrowed time. It means you are completely reliant on your monthly income. If anything happens to that income (restructuring in the company, downsizing) and your up-shit creek with no paddle. To avoid a situation like this bring your expenses under control immediately.
Indias average household savings rate was 30% in FY 2017. And thats just average. Its one of the better countries in the world. How does that compare to your savings?. Try and beat this average every month.
How often should you calculate your savings rate? I would recommend that you do it monthly. If this drops below 40%, course correct immediately. Cut down on your variable expenses and reign in your spending.
You can see the impact of cutting down your expenses on your savings rate in this previous article.
2. Fixed monthly Expenses:
These monthly expenses that you must pay, regardless of what your income is. This includes things like rent, home loan payment, utilities (water, power) municipal taxes, sanitation payments car loan etc. Club all these together and they’ll make up your Fixed monthly expenses. Why calculating this is important is this is the minimum amount that you need to shell out to keep your standard of living. This number should be as low as possible. If its close to 50% of your monthly income its bad. Thou remember its not the end of the world thou. Its difficult to reduce fixed expenses but its not impossible. If this number is too high you need to take drastic steps and quickly.
Review this once a quarter and action the low hanging fruit.
3. Calculate Net worth:
Add the value of all of your assets (Owned house, bank balance, Mutual fund investments, EPF, PPF, Stock investments) and subtract all your liabilities (Car loan, house loan tax liability etc.) and you’ll arrive at your net worth. If this number is increasing each year that’s a good thing.
Review your net worth at least once a year. I recommend somewhere in the month of July. Why july? because your EPF interest will be credited, plus you would have paid your taxes. So you’ll have a clearer apple to apples comparison with the previous year.
So how does measuring this stuff help, well it helps you focus your attention on things in your control. Most of our expense spiral out of control because we don’t know what they are. Or how much we are spending on what. When we are aware of where we are spending and how much we are not saving the inclination for unnecessary expense seems to suddenly drop off. Plus when we measure, we can take specific actions to specific problems. Do you have a lot of consumer debt (credit card, or online EMIs?) Plan to pay it off quickly. Is your rent very high? See if you can move to a cheaper place. Your fuel expenses are ridiculous? See if you can move closer to work. Eating our eating all your money? Start cooking at home and carrying lunch.
This compared to the general statement of I need to save more which never ends up happening. Once we start measuring you can start managing. There’s no need to get overwhelmed. Take it one step at a time. And if you need help in analysing any of this you can always reach out to me.
So, measure money manage money.
Once again Signing out
May the Poixe stay with you