Part Three - Spending Pattern

Work done till now:

1. Start a mutual fund account with one/two AMCs and put money in the liquid fund.

2. Got health insurance.

3. Got life insurance.

Now to the question of how to go forward about the monthly fixed/variable salaries.

The most basic rule of Saving/Investing is Earn more, spend less. If you are not doing that, no investment plan is going to get you off the ground. You are digging a hole faster than it can be filled.

Some more Terms:

1. ATM card (=automated teller machine card). Basically, a historical thing. It was used in an ATM machine (please, I am not going to tell what an ATM machine is!!) to transact. Not available anymore, in a working condition.

2. Debit card (ATM card functions plus Can be used at merchant’s outlets namely stores, hotels, and online purchases). Since it has ATM card functions also, can be used freely at ATMs.

3. Credit card (this is not an ATM card but can be used at merchant’s outlets).

4. To use in ATM machine: please use Debit card ONLY. Never a credit card.

5. To use for shopping: please either use Cash or slightly prefer a credit card than a debit card. Basically, cash > credit card > debit card.

How they function:

Debit Card: your card is associated with your real bank account number. And the amount currently in your bank account is the limit for that debit card. So, if the account has 5,000 rs, then you can either withdraw cash up to 5,000 or make a shopping purchase for up to 5,000. If you accidently tried to do a shopping of 5,001, then it will be rejected on the spot.

Credit Card: your card is associated with a virtual account, which has a limit. This limit is decided by the bank/credit card company (yes, American Express is an exclusive credit card company without an associated bank, while ICICI bank has both services). This virtual account works like a postpaid mobile bill. Whatever purchases you make are added up and you are presented a bill at the end of month. You are given 20 days to pay up that bill. If you pay within those 20 days (before last date) AND, this is really important, if you pay either the full amount or any amount more than the bill, then GREAT. You managed to use extra money from the bank at zero cost to you practically. Continue this always.

Never pay only the Minimum Amount Due or even 1 paise below the bill amount. If you do that, you will incur heavy charges at the rate of 40% per year (which is at least 10 times your savings bank account interest rate).

Better still, don’t own a credit card till you are financially savvy enough. Use Cash and be merry.

Rules of Thumb with all those Sales advertisements and Big Annual Sales days

Rule 1: If you get an impulse to buy something, put a 72 hour rule between the urge to buy and the actual buy order.

Sidenote: New scientific studies have shown that the serotoninergic receptors take up to 72 hours to absorb the excess serotonin secreted when that buying urge gets triggered. I could have linked up those studies, but then this is all just scientific mumbo-jumbo to really convince you about the 72 hour period! There isn’t any such study known to me. Just kidding.

Rule 2: Please delete all those shopping apps from your smartphone, namely amazon, flipkart, myntra, etc.

Sidenote: You just need one app – Headspace for meditation during those buying impulses. Again just kidding.

Rule 3: Start automated investment setups, so that your money goes away from bank account before you can even think about spending.

Flexi Rule 4: How much to Save?

Now that we have curtailed spending and have easy setup for investing, the basic question is how much you should save?

The basic idea is Save as much as you Reasonably can. If that is 60-70%, good (Pattu does that, I do that). If it is 30%, well and good. If it is 10%, again decent, since it is better than 0%. Once you start seeing results of your savings, you will get better. With better incomes, and lesser spendings and more focus, the rate of savings will increase. Don't get limited on to 10%, since that is what I have seen most recommended - that amount is seriously insufficient.