Living on the financial edge

Coming fresh out of b-school and moving into work, I was at the peak of my enthusiasm. After 18 to 19 years of studying and learning, now was the time to 'prove' oneself and make a mark in the corporate world I thought. So it mattered little that my first day on the job was just a week after our final exam at business school. (Some of my friends had almost three months off)

After a month of training I was told by the HR manager, “We have a vacancy in Vijayawada for industrial lubricant sales. You will be moving in there. Congrats.” and out came the hands for a handshake.

I had insisted all along during my training phase that I wanted to be in industrial sales team. Finally, I had got it!

In those initial days, 'proving oneself' was the only priority. Every thing else can wait. So out went any sense of financial discipline. I had pretty much no clue when salary came and if and when it got spent. “Savings can wait. I have a long career ahead.” I used to think in those days.

Things were so bad that I did not claim any deduction under HRA by showing rent receipts. I was too busy 'working' to bother about these minor details! Of course, since there were no savings, there were no investments...

It was only after a year when I switched jobs and moved to Chennai that I realized that I was in financial trouble. I had to take loans to cover my initial costs of relocation. Taking money from your parents after one starts earning somehow did not go down well with me. Even though I had every plan to return it 2 to 3 months down the line.

To get myself out of the financial mess, I read a few books and magazines and started out. It was clear from my initial reading that at a young age I needed to be invested in the stock market especially with a booming economy. Further since I did not have time to do research to pick stocks for investing I took the mutual fund route.

Two years down the line, I have a much better financial position. With enough cushion to take care of any unforeseen financial disaster.

I hope the above story does not sound like a self glorifying tale. I am sure other people have done better with their finances than I ever did.

Now, I try to help out other people facing problems not different from my own earlier in my career. And going by experience, there are many in financial distress! Typically young people in financial distress have no idea how much and where they spend their salaries, over spend on their credit card, have taken loans they cannot service without drastically cutting down on their lifestyle and have very little clue how much, where and why they have invested. Investments usually mean saving Rs. 100,000 for tax saving purposes typically around December when the company asks for proof of investments.

Based on my experience, the key to getting out of this financial distress is to make a monthly income – expense statement. Basically, to get to where you want to be, you need to know where you are. Basics of strategy formulation.

Just making the income-expense statements throws up startling facts. I know of people who were spending more than they earned without ever realizing it. And some who were just accumulating money in their bank account because they were spending a small portion of their income.

After knowing where you are, you need to know where you want to be. What are the goals in life and when do you want to reach that goal. Example: - Buy a house in 5 years. This goal means that the person needs to save up enough for the initial costs of house purchase. And also have enough income to service the EMIs thereafter. Other goals could be taking a world tour, buying a car, saving for retirement, even donating for charity etc. Each of these goals means that one needs to save X amount of money today to have Y amount of money in Z number of years.

Typically X will be in thousand of Rs. while Y would be in lacs or millions or even crores. Thats the power of compounding of interest i.e. Interest on interest.

One the current position and future goals are clear, one needs to get there. There are various ways to save money. Mutual Funds, ULIPs, PPF, NSC, Fixed deposits are some of the ways. One needs to choose these instruments based on primarily five things, the returns needed, the risk taking ability of the individual, tax savings required, time period of investment and the liquidity expected i.e. the ability to withdraw the money when needed.

For every person, the means or the type of investments to make differ. My strategy for example over the last two years has been to invest in tried and tested tax saving and open ended mutual funds. Mainly because I am willing to take risk and wait for the returns to come. Off late I have started parking funds in cash management funds which give relatively lower returns (Returns much higher than a bank account though) but high liquidity i.e. I can withdraw the money whenever I want without any additional charges, almost like a bank account.

Hmmmm. Too much gyan I suppose. I guess end of the day it eventually boils down to whether you want to do it. Being disciplined now for getting future gains. Easier said than done.