Three rules of money you should religiously follow

Imagine there was no coronavirus pandemic and life was going on as usual. No lockdown, steady economy and no threat to the job… If there was a choice between buying a smartphone and a health insurance, you could have chosen the latest gadget and postponed buying health insurance. But then, Covid-19 hit us and taught us to not only look after ourselves but our money too.

Here are three rules which will help you to rejig your relationship with money:

The 50/30/20 rule

This rule was popularised by Elizabeth Warren in her 2005 book- All your worth- The Ultimate Lifetime Money Plan. The thumb rule is to categorise your budget into three buckets- 50% to be spent on your needs, 30% on wants, and 20% savings.

This financial discipline will help you to keep a tab on your spending. Your rent, grocery and bill payments will go in the needs bucket. Then we move to the want bucket,  eating out, movies, and shopping for whatever you aspire but don’t cross the borderline of 30% of your income. Now comes the most important 20% bucket, which is your saving kitty. This amount must be invested systematically in the several instruments available in the market.

Become financially lean

Cutting down extra flab is never a bad idea. The 50/30/20 rule allows you to spend 30% on what you want but we suggest squeeze your wants. Buy what you need,  the things that you can’t do without, and cut down on your non-essential expenses. Spend what you have and not what your credit card can afford. Stay debt-free as far as possible because the burden of debt will never make you financially lean.

The Latte Factor

Personal Finance writer David Bach’s book The Latte Factor tells us to spot the latte factor of our lives and start saving. How do you do that? You like ordering food on weekends. In a month you end up ordering around 6 meals.

You spend around Rs 2,000 for every meal, sometimes less or sometimes more, So, in a month, you spend Rs 12,000 and in a year it would be Rs 1,44,000. If you slash this by 50% then you save Rs 72,000 annually or Rs 6,000/month. This Rs 6,000 should be put to good use.

Let us assume that you invest that Rs 6,000 per month for five years in a SIP which gives you a return of 10%. The invested amount in 5 years would be Rs 3,60,000, the return on it will be Rs 1,08,494  and the corpus would be Rs 4,68,494. So,  instead of ordering Chinese food, save money, and invest!.

These three rules are important for you to build a healthy relationship with your money. Never let a good crisis go waste instead learn from it and restyle your saving and investments.