I will continue the good money practices that I followed in 2010.
I practiced a few disciplined money management techniques over the course of 2010 and I found these techniques to be incredibly useful in helping me manage my personal finances. I will carry these good practices into 2011 refining further where possible.
I describe these techniques — five in all — below.
- Technique #1 — Saving well in advance for your annual expenses through what I call the “Annual Expenses EMI” technique.
Regular readers of this blog know that I strongly advocate first listing all of your annual expenses and then creating an annual expenses chart, the output of which is an amount of money, that we’ll call M. Simply treat M as another EMI that you need to pay each month. Do this and the next time that car insurance is up for renewal you can cut a check without blinking an eyelid. Trust me on this one — this method simply works.
Update: I find this technique to be so incredibly useful that it’s ingrained into my subconscious now. Happens like clockwork each month. And I have some good news — a couple of friends and I are working on developing an easy to use web tool to help you get started with creating your own annual expenses chart. Stay tuned for more details.
- Technique #2 — Breaking-up planned expenditures into monthly saving targets and setting this money aside each month from my salary.
More often that not, you will have a fair idea of your expenditures (planned purchases, service bills, etc.) over the next six months. Rather than incurring a big outgo in one month, make an approximate estimate for these expenses and start saving for them each month (you could set this up as a short-term goal). I’m doing this right now for repairs that need to be done on the Swift. I’ve estimated that these repairs will cost me Rs 30,000 (new wheels, body damage repairs) and I’m setting aside Rs 5,000 each month from my salary.
Update: This technique actually sounds cliche. “Come on. Plan and save for your expenses. We all know that.” But do you really sit down and do that month-in and month-out? Believe me, this technique works incredibly well too. Result: No credit card needed. I broke this rule once this year and suffered a negative cash flow for a couple of months.
- Technique #3 — Online bill pay where possible failing which making advance utility payments.
I’ve already written in detail about this before. Luckily, Bangalore One centers accept cash that’s more than what’s due on the bill. Works to my advantage.
Update: Saves me time. And time is money. Right?
- Technique #4 — Each month:
minus Annual Expenses EMI
minus Budgeted Expenses
minus Savings for Short-term Goals
minus Investments for Medium- to Long-term Goals
minus Non-budgeted Expenses
= My Free Cash Flow
for that month.
This personal finance equation now forms the bedrock of my personal finances. I use my free cash flow either as “fun money” — which means I’m free to use it as I wish to — or I channel it back as an additional investment into my financial independence portfolio. More often, it’s the latter.
Update: I usually don’t end each month with too much of free cash flow. And what little I end up with, I dump it into my financial independence/freedom portfolio. As I wrote above, I did have a negative flow for a couple of months though and that was seriously painful.
- Technique #5 — Tracking my personal finances using a simple spreadsheet model.
I’ve setup a spreadsheet with the following tabs:
- Cash Flow, where I track my cash flow using my personal finance equation.
- Primary Savings Account, where I track my single source of financial truth.
- Short-term Goals, where I detail goals less than a year away.
- Medium-term Goals, where I detail goals less then three years away.
- Long-term Goals, where I detail my financial independence portfolio.
- Goals/Net Worth Tracker, where I track my goals and compute my Net Worth.
- Performance Dashboard, where I track my progress.
I update this sheet on a weekly basis and have kept it purposefully simple. In 2011, I plan to add just one more sheet to track D’s finances.
Update: All those ERE-charts come straight from this worksheet.
I’d love to hear your thoughts. Would any of these techniques be useful for you?