Authored by Neha Kalia, Consultant-The AZAD Programme
Step 1 Rationalize
Over time we invariably end up with multiple bank accounts, mutual fund investments, fixed deposits etc. For each financial account or holding that you have, you will have multiple statements and communications coming in to you through the year. What’s more, each of them has to be accounted for separately and included in your tax returns. But do you really need so many different accounts, folios and deposits?
Scrutinize your multiple accounts and investments and only keep those that you really need. You should ideally have two savings accounts. Both should be held jointly with your spouse, one where you are the first accountholder and one where your spouse is the first account holder. Depending on your liquidity requirements, you should have anywhere between 1 to 5 fixed deposits. And in case of mutual funds for the average Joe, anything above 5 to 6 well-selected funds is just unnecessary diversification. Amalgamate the rest and reduce your financial footprint.
Step 2 Prepare a Financial Master List
Once you have rationalized your accounts and holdings, document all of them in one place. Just basic details like Account number, Names of Accountholders, Name of Bank /Mutual Fund / Financial Institution will do. Against each one you can also mention special comments, if any, for example ‘this account is for household expenses’, ‘this fixed deposit is for down payment of new car’ etc. This Master List acts as a ready reckoner or summary so you can get the big picture in an instant and don’t have to scurry around searching for account numbers etc.
You can pencil it down on a piece of paper or save it on an excel sheet. But make sure your Master List is not accessible to others and never note down login-ids, PINs and passwords. It’s also very important to share the list with your significant other to consult in case of an emergency. For medical exigencies, you can save your medical insurance details on your cell phone so you can access it whenever required without having to go home and rifle through your files in times of a crisis.
Step 3 Opt for Internet Banking
If your bank still doesn’t offer Internet banking…change banks! With Internet banking you can have access to your updated account information at any time. This ease of access cuts down on many boring chores like updating passbooks, reconciling your balances etc. and of course also helps reduce the risk of your cheques bouncing since you can easily confirm your account balance before writing a cheque.
Even for investments, you can set up an e-portfolio on many financial planning websites. This helps you track your portfolio across various fund houses in a consolidated manner.
Step 4 Reduce Paper
Switch from hardcopy to e-statements wherever possible. Maintain a separate folder in your email account to keep these e-statements organized. This not only reduces the paperwork you have to handle but also reduces your carbon footprint. What’s more, it’s easier to file e-statements and access them quickly when required. When its time to send your statements to the CA for your tax returns, you won’t be running around at the last minute compiling all the statements.
Step 5 Set up Reminders
Use any of the plethora of calendar applications to set up recurring reminders for critical dates like EMI payments, Life Insurance premium dates, Car Insurance renewal dates etc. Spending one hour to upload these reminders will save you time, money and the stress associated with keeping track mentally and invariably missing out on some important action items in the course of the year.
Step 6 Move to e-Payments
Leverage technology to simplify your bill payments. Setup e-bill payments wherever possible and start using online transfers to make other repetitive payments like rent payment, EMIs or school fee. Automation is your best friend in helping you get organized.
Switch to a lower frequency of payment wherever possible and affordable. So if you pay monthly premiums on your insurance policy…switch to quarterly. If you already pay quarterly, switch to annual. This brings down the total premium amount as well as reduces the work involved in paying the premium each time. You can do the same with expenses like paying for your cable on a quarterly or annual basis rather than paying for it every month.
Step 7 Simplify Filing
Even after opting for online banking, e-statements, e-bill payments, e-transfers etc. you will still get some snail mail pertaining to your finances. Designate one place in your home like a drawer or box where you can keep putting away all financial papers.
Once a month go through the collected documents and file what is needed and discard what is not. File documents in easy box files that you can just dump paper into (rather than punching holes and stringing them up). Keep 3 to 5 folders that cover various categories like bills, investments, loans, taxes etc. Your filing system should be simple, easily accessible and maintained in a safe place in the house.
Step 8 Prepare a Monthly Budget
The benefits of having a budget are universally acknowledged but many people shy away from using it to manage their household finances because they are intimated by the technical nature of the beast. But it doesn’t have to be that complicated. Even a one-line budget like, “spend Rs.50,000/- and save Rs.10,000/- from income of Rs.60,000/-“ is better than no budget at all! You can develop it and go into more details as your budgeting skills improve with time. There are many free worksheets available on the Internet to help you with this activity.
Budgeting, no matter how simplistic, helps to bring predictability to your expenses and savings. It makes you feel more confident about your finances and helps you develop a more positive relationship with your money.
Step 9 Track Expenses
One of the prerequisites of a good budget is to know your expenses well. You should track your expenses really closely for 2-3 months. After you establish a pattern, you can relax and only continue to monitor big ticket spending items.
To track your expenses more easily, try reducing the times you pay for things in cash. The higher the proportion of expenses paid using debit/credit cards, the easier it becomes to track them at the end of the month. (It goes without saying that credit card bills should be paid down in full each month! Use credit cards just as a tool to document what you spend on.) This way you can track your expenses better with very little extra work from your side. You simply have to go over your statement and mark out the various expenses you have incurred in the past month. And voilà! You know where your money is going.
Step 10 Plan for your Future
Once you have organized your finances, look to the future and start planning for your long-term financial needs. Plan for your health and life insurance, your own home, your retirement, your kids, your parents, your dream business venture, your hobbies…your life.
Unfortunately there are no easy, quick steps here and you definitely require professional assistance to do it well. But the only step you need to take is to identify the right Financial Planning professional. With him / her in your corner, you can develop a proactive approach to planning your life and fulfilling your aspirations.