This is an important topic for discussion and therefore I decided to dedicate a separate blog for it. According to me, this is one of the biggest mistakes done by a lot of people wherein they just let the money sit idle. We need to strive for a position wherein even when we are sleeping, our money is working hard and making more money for us. But, when we just let it lie idle in the bank account, then we are losing the money very fast to inflation.
This is not just one issue, but there are multiple other issues associated with this. Let’s go through all of them one by one.
I have come across people who just use their savings bank as a check-in account. Every month, salary gets into the account, all expenses are paid from this account and the surplus money just keeps getting adding into the bank account. Over some time, it becomes lakhs of rupees. No other investments, all expenses are paid from this account directly. A big problem! While it may make a person feel good while checking the bank balance, please understand that this is illusionary. If on average, inflation is at 7% pa, this money is just earning about 3.5% p.a. interest, and that too taxable! So, every single day, we lose money to inflation. What you need to buy for Rs 100 today will be available for Rs 107, a year later and your bank would have only Rs 103. Soon, the power of compounding catches up and we end up withdrawing a lot of money from the corpus.
I can certainly understand if the money is parked into the account for a short duration, if you know that you would need the money soon. Even for that there are products like liquid funds and ultra-short bonds which can get higher returns and also with high liquidity and no penalty for early withdrawal. By no means am I suggesting that there should not be any money in a saving bank account? We need to have some money for our regular online automatic payments for various bills and also for an emergency purpose (you never know you could have an emergency on bank holidays when your mutual funds would not be accessible!).
There could be situations wherein friends and relatives need the money and they already know that you always have surplus money in your bank account. They approach you and even if you do not want to lend money to them, you are not able to refuse and soon the money goes out of your bank account. With a promise that it will be repaid soon, but it is returned late, or worse, the money is never returned. Then it is an awkward position wherein you would not like to spoil your relationships for money, and then the money is then slowly written off. Many relationships go bad due to just one culprit – MONEY. My advice to people is always to keep money and relationships separate, both are too valuable for us to choose between them.
I know people who lack self–discipline when money is in their bank accounts. It becomes difficult to control expenses and money gets spent on a lot of wants and not just the needs. Future planning is not done and soon, the situation goes out of control. The bank balance keeps depleting and we start living paycheck to paycheck. It becomes difficult to get past the entire month. There is no other option but to start taking loans to meet the regular expenses. Scaling down of the luxurious life becomes difficult and before we realize, we get into debt trap. Easy to get into it, but difficult (though not impossible) to come out of it. Do read one of my previous blogs, wherein I have mentioned some strategies to come out of it.
Since for all our expenses we simply start taking out money from this account, there is no budgeting done and no planning for the future too. We do not track how much money we spend every month for all our various expenses, how much we need to accumulate for our various goals, etc. By the time, this realization sets in, it is already too late, since we did not take the power of compounding to our advantage. Financial freedom becomes a distant dream.
This problem is a no-brainer. Having the entire amount in one bank account can be risky. We all know about the increasing internet frauds by phishing, vishing etc. What if account details get hacked and the money is swiped away by fraudsters?
Now that we have discussed what are the issues of keeping the money in one such big account, let us discuss what we should do?
What most people do:
Income Minus (-) Expenses = Savings
We keep procrastinating the plan for savings, waiting for the right opportunity when we would have enough money for it. It turns out that there are extra expenses in a month either due to any emergency or due to the luxuries (generally the latter) and the decision for investment shifts to the following month, and then the following …..
Change the mindset. Make some changes to the above equation:
Income Minus (-) Savings = Expenses
Pay yourself first. Prepare a high-level budget. Know your monthly expenses, and the various other quarterly and annual expenses. Keep some contingency over and above this. Plan to develop an emergency fund of six months’ expenses. Once this is done, first, keep aside the money for investment either in a separate account or set up the various investments from your existing account. Utilize the remaining money for your expenses during the entire month. Hopefully, this amount would be equal to your monthly expenses which you calculated. If not, then make a plan on how you would be able to achieve it. Initially, starting with a small percentage of savings, say 5% or 10%, then gradually keep increasing it. You will be surprised how humans are so adaptable to the change, and before you realize it, you get very comfortable with your downgraded lifestyle. I am not suggesting at all that we cut corners and live a stingy life. All I am saying is that if there is a scope of cutting out some wasteful expenditure and if that can get is into a wealth-building track, then that should be the first step. Once we start letting the money generate money, then we can of course start spending that additional money, but why spend the Principal amount itself and then live life paycheck to paycheck! I am only suggesting delayed gratification and nothing else!
I have made the calculations are a lot easier for you. You may download my FREE Personal Finance Toolkit to get started with your budgeting. It has all the information you would need in one place. I am sure, you would be thankful for it. So, take the first step!
I sincerely hope this blog was useful. There was nothing extraordinary information here and most of it was just common sense. Sometimes, in our daily grinds and in the pressure of meeting targets, we just forget the simple basic rules. Therefore, I just wrote this up to get us on track.
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