Foundations of Money Management
Do these before you start Investing
Before investing or managing your capital, you need to understand the foundations of money management.
Regarding Personal Finance, several Tips and Tricks are available online. But none of those would work if you are not process-oriented and disciplined with money.
In this lesson, we will discuss the different aspects of Personal Finance & Money Management to form a simple 10-step financial plan.
Guiding Principles
Here are the 4 Guiding Principles of Mooney Management:
Preserve Capital. When it comes to both Personal Finance and Investments this is Rule #1. Do not lose capital through risky investments when you start your journey. For example, do not trade or invest in the Stock Market directly without understanding. Before growing your capital, you need to understand mechanisms to protect what you already have. For example, a sudden medical expense might drain your capital. Always have insurance in place to preserve capital.
Think Long-Term. Money Management is a marathon, not a sprint. How fast you run the first lap of a marathon doesn’t have anything to do with the final outcome. Trying to run fast initially might put you at risk of not finishing the marathon. To finish well, you need to first finish. Slow and Steady > Fast. Focus on building wealth for the long term.
Be Goal-oriented, Have a Plan and Stick to it. Have a plan for expenses. Spend what you allocate in your expense account. Greed and Fear will make you deviate from the original plan. Do not act on impulse. We will discuss a simple financial plan towards the end of this article which will eliminate greed, fear and regret. Customise it as per your goals and stick to it. Behaviour > Everything else.
Get back your time. Financial Independence is not about retiring early or chilling or not working. It is about getting back the time to do what matters to you the most.
Anything that is not aligned with these 4 principles should be dismissed without a second thought.
Let us now discuss the technical aspects before discussing a sample financial plan.
The Different Aspects of Personal Finance
When you come up with a personal financial plan, you need to take care of these aspects strictly in the following order.
Insurance
Emergency Funds
Debt Reduction
Savings
Expenses
Tax Planning
Investments
Growing Income
1. Insurance
The first thing to do is to ensure you protect capital. Hence you need to take Term Insurance and Health Insurance from Day 1. This will ensure there is no big outflow from your pocket.
Term Insurance:
Term insurance is a life insurance policy providing coverage for a specified period.
Benefits your family.
~₹500-₹750 per month or more depending on the individual and plan.
Health Insurance:
Covers medical expenses incurred due to illness.
Some Employers might provide Insurance up to a certain limit. Good to have your own personal Health Insurance that provides higher coverage.
Costs ~₹500-₹750 per month or more depending on the individual and plan.
Getting an Insurance should be the first thing you should do.
2. Emergency Expenses
Life doesn’t go as planned sometimes. You need a backup.
It is said that Humans can survive with just 1 lung. But nature has given us 2 lungs. Nature has provided us with additional capacity and cushion. Similarly, Emergency Funds act as a financial cushion for unexpected expenses or job loss.
Emergency Fund is like your own bank. You can borrow money from yourself at no interest during an emergency. High-interest loans from banks deplete your capital quickly.
Most of all, they provide peace of mind knowing that you can cover your living expenses for a few months to a year in case of an unfortunate event.
Here are a few guidelines for managing emergency funds:
Build an Emergency fund that takes care of at least 6 months - 1 Year of living expenses.
The best place to park money for Emergency Funds is a simple savings account or liquid mutual funds.
Maintain a separate savings account for emergency funds. You can explore Small Finance Banks that provide higher returns on savings accounts.
3. Debt Reduction
After taking Insurance and building Emergency Funds, your next goal is to eliminate debt.
Generally, I avoid debt. The only debt I took was for my postgraduate education. It helped increase my income many folds helping me build capital faster.
Here are a few guidelines:
Do not take debt for spending (Car/Bike/Phone), Trading, Investing etc.
I would recommend avoiding credit cards at the beginning of your career. Anything that would give rise to bad behaviour should be avoided.
Credit Cards make you spend unnecessarily as well. I have seen people buy stuff just because it is in an offer and not that they need it.
Also, Credit Card interest rates are ridiculously high if payments are missed.
In short, pay off all your debt before you build capital or invest. No loans or credit cards at the start of your career.
4. Savings
Once you build an Emergency fund that covers 6 month-1 Year Expenses you need to target a certain savings rate every month. The savings rate is the amount of money you save every month expressed as a percentage of your income. Here are some pointers:
Target a savings rate of at least 20% of Income/Salary every month and then move upwards.
The reason I have kept Savings above Expenses in the order is to emphasize “Save first before you Spend”.
Maintain a separate bank account for Savings and Emergency Funds. Set up automatic transfers from your salary account to your savings account each month.
5. Expenses
What falls in this category are the Planned Expenses such as rent, food, fuel, power bills etc. So you can very well stick to a plan. Unplanned expenses are taken care of through Emergency Funds and Insurance.
Here are some guidelines on Expense Management:
Maintain a separate bank account for Expenses. So you will have 3 bank accounts.
Salary Account
Savings and Emergency Funds Account
Expenses Account
Spend only from your Expenses account. Stick to your budget and resist impulsive spending.
Buy Quality Products even if it costs a tad more. They last longer and provide a higher ROI over time. Here is an example from my life. In 2014, I got a Lenovo laptop for ₹42000. My friend got an Apple laptop for ₹70000. By 2021, I had changed 2 laptops and was using my third one. I had spent around ₹1.3 lacs on laptops in those 8 years. My friend was still using his Apple laptop in 2021 and he still has it in decent condition in 2024.
Be aware of the Diderot Effect. It can be seen when someone purchases a new piece of furniture for their home. Let's say a person buys a modern sofa to upgrade their living room. After introducing this new addition, they may suddenly find that the rest of their furniture looks outdated in comparison. This might prompt them to start replacing other furniture, such as the coffee table, chairs, and even decorative items like curtains or artwork, creating a cascade of purchases. The initial acquisition of the new sofa triggers a domino effect of spending.
Buy products in bulk wherever possible to reduce costs. For example, instead of buying 1 tissue paper box, buy 10 at once. These things add up over time.
Allocate 1/3rd or 1/2 of your Income every month towards your expenses. You decide. If anything is left over in a month, transfer it to your savings account.
6. Tax Planning
Effective tax planning can help you save a significant amount of money. Certain tax-saving instruments such as PPF also serve as good investment opportunities enabling wealth creation as well. Here are some guidelines for tax planning:
Understand Your Tax Slab: Take time out to know the income tax slab you fall under based on your salary.
Invest in Tax-Saving Instruments: Consider investing in tax-saving instruments like the Public Provident Fund (PPF), National Savings Certificate (NSC) etc.
Utilize Section 80C: You can claim deductions up to ₹1.5 lakh under Section 80C on investments in PPF, Employee Provident Fund (EPF), Life Insurance Premium etc.
Health Insurance: Premiums paid on health insurance for yourself, spouse, children, and parents can be claimed as a deduction under Section 80D.
Education Loan: If you have an education loan, the interest paid on the loan can be claimed as a deduction under Section 80E.
House Rent Allowance (HRA): If you live in a rented house, you can claim House Rent Allowance (HRA) to lower your taxes.
Home Loan: If you have a home loan, the principal repayment qualifies for a deduction under Section 80C, and the interest repayment qualifies for a deduction under Section 24.
7. Investments
Now it is time to convert some of your savings into investments to build wealth for the long term. You should start thinking about Investments only when:
Insurance in place.
Emergency Fund is built.
All your debt is paid off.
Regular Expenses are manageable.
Once all these are taken care of, you can learn about PPFs, Government Securities, Index Funds, Sovereign Gold Bonds etc to start your investing journey.
8. Growing Income
The smartest way to grow your capital is to focus on your job and increase your income/salary. Below is the graph of how my monthly salary grew over the years. My salary increased from ₹30000 per month to almost ₹2,50,000 per month in 8 years. 2014 and 2015 is when I did my MBA. So, in those years I did not earn income.
The number one mistake committed by beginners is trying to grow Capital Fast through Investments and other risky means instead of focusing on the job and gaining skillsets. Use other’s capital to experiment as much as possible before you start playing with yours.
The last 3-4 years of my job helped me build significant capital so that I could quit my salaried job and pursue Investing/Trading full time.
Avoid risking Capital in Direct Stock Investing, Options Trading, Bitcoin etc without learning.
Avoid highly ambitious and pointless goals such as achieving ₹1Cr before age 30 etc. Why do you want to put unnecessary pressure on yourself?
Let us discuss a realistic plan with which you can do well in your life.
A Simple Financial Plan to Start
If you earn ₹30000 per month as a starting salary here is a simple way to manage it.
₹750 per month for Term/Life Insurance
₹750 per month for Health Insurance
₹5000 towards Loan EMIs if any
₹10000 monthly to Emergency Fund till it covers 6 Months- 1 Year expenses.
₹10000 to Expenses Account for monthly expenses.
Closing debt should be your priority after you build an Emergency Fund.
In future, take debt only for education or to gain skillsets which in turn help grow Income many folds.
Understand Taxation, Plan Tax effectively and Invest in Tax Saving Instruments such as PPF.
After getting Insurance, setting up an Emergency Fund, achieving Zero Debt and effectively planning Tax, you should start with Index Investing in the Stock Market.
Once you do the 9 things above, you will be in control of your finances and then you can take it forward.
I hope this post gave you some clarity on money management.
All the Best!