CashCow Chapter 1.2 – Smart Expenses

Every month on the 1st date, you receive an SMS of your salary being credited into your bank account.

Followed by a few more SMSs in the next 3-4 days

  • Home loan EMI deducted
  • Car/ bike EMI deducted
  • Personal Loan EMI deducted
  • Credit card bill payment is done

Within 4-5 days, 50% of your salary is gone and with the remaining salary you need to pay

  • Rent
  • Grocery
  • Utility bills
  • Child education

For some people, even the salary amount is less to cover up all their monthly expenses.

Do you think they would be able to save money and create wealth?

If you are able to save 30% of your salary then consider yourself lucky. Reducing expenses is one way to increase savings.

But we don’t have to compromise our existing lifestyle and behave like poor. We have to become smart.

We should be able to spend on the stuff that matters to us and reduce the expenses on things that are not giving us extreme happiness.

Expenses are of 2 types:

1. Non-Avoidable – Rent, daily commute, utility bills & groceries that you need for living. For example, the money you pay as rent to your landlord is unavoidable, right? because if you do not pay then he will kick you out of the house.

Electricity bills, gas, mobile expenses, and groceries (dal, chawal, fruit, milk and veggies), all are non-avoidable expenses.

2. Avoidable – Junk grocery (coke, snacks), dining outside, casual shopping, gifts, travel & gadgets. Your life can go well without these expenses, right? Grocery under this category includes junk food items like coke, chocolates, pastries and other cravings.

Avoidable & Unavoidable expenses

You will not know whether the expense is avoidable or unavoidable unless you are tracking every rupee. You can use a spreadsheet or mobile app to track your expenses.

Let’s say these are the expenses for the month: 

Home EMI – Rs. 30,500

Car EMI – Rs. 18,000

Credit card bill – Rs. 8,500

Electricity bill – Rs. 1000

Mobile recharge – Rs. 500

Gas expenses – Rs. 700

Groceries – Rs. 3,200

Dining – Rs. 1,600

Movies – Rs. 1000

A total expense of Rs. 65,000. If your monthly salary is Rs. 90,000 then after expenses you are saving Rs. 25,000 per month.

On a closer look, there are certain expenses that can be avoided like dining of Rs. 1600 and Rs. 1000 spent on movies.

The easiest way to know avoidable and unavoidable expenses is by looking at the shopping bills or credit card statements.

Please note: I am not suggesting to stop spending money on your leisure. I am just saying that you must know how much money you are spending on avoidable segments every month.

You don’t have to cut all the avoidable expenses at once.

First, become aware of where your money is going and then start cutting the weeds.

Resources to Track Expenses

You can use the following tools to track your monthly expenses:

  • Spreadsheets
  • Walnut app
  • Monefy app
Spreadsheet for monthly expense tracking

You can make a separate column in the sheet for unavoidable expenses and avoidable expenses.

4 Rules to Minimize Avoidable Expenses

Rule 1 – No EMI purchase

I am talking about a personal loan.

You would end up paying between 12% to 15% interest when you convert your purchases to EMI. Have you ever thought – how hard it is to get 15% returns on investment?

Even 0% EMI is not healthy for your finance because that model is designed to lure customers to buy things that they don’t really need. You won’t find a 0% EMI option on the non-avoidable expenses.

Companies want you to pay more for avoidable expenses. 

Think about it.

When you say no to EMI you will save yourself from unnecessary expenses on things that you cannot afford to buy within your income.

Rule 2 – Stop impulsive buying (7 days waiting rule).

If you are a fan of Apple products then you would have a dopamine rush in your mind when you hear the announcement of the iPhone 12.

That creates a strong urge to buy iPhone 12 even if the price is above Rs. 1Lakh. That’s why people buy expensive iPhones by selling their kidneys. That could be an overstatement but people get into financial troubles because of overspending.

You need to control your impulsive buying habit temporarily until you fix your current financial situation.

Try following the rule of waiting for 7 more days.

Write down every day why you want to buy that gadget. Take the final decision after 7 days of waiting. If you still have a strong urge then you may really need that product.

Postponing impulsive buying for seven days will cut off your avoidable expenses and will keep more money in your wallet every month.

Rule 3 – Start a Faltu Kharcha Fund

(Allow yourself for unnecessary expenses – but with planning)

Instead of taking a loan for your avoidable expenses, a powerful way is to create a “Faltu Kharcha Fund”.

Remember when your father asked you to stop doing faltu kharcha on travel, bike, or gadget? They mean to say – stop making unnecessary expenses.

But we can’t live a life like a poor. We should keep pampering ourselves even during the process of becoming wealthy.

Your ‘Faltu Kharcha Fund’ can be used for a foreign vacation, luxury bike, diamond jewelry, destination marriage, cool gadgets, expensive clothes, home renovation and items which give you the feeling of being rich.

Rather than taking a personal loan use your own money for leisure. The fund would keep your expenses in control, save you from loans and save your costly interest amount.

You will neither put pressure on your savings nor you need to buy on EMI.

You can open a recurring deposit (RD) account where you deposit a fixed amount every month. 

You can use an iWish account from ICICI Bank for creating funds for Faltu Kharcha. 

iWish is a recurring deposit account where you can save for celebrations (festivals), vacations, vehicle purchases, gadgets and expenses for babies & kids.

You can use the calculator to fix the amount needed for your wish, the time period and the per month saving amount gets auto-calculated.

Become Your Own Banker

Starting a Faltu Kharcha fund will give you control over your finances.

With this fund, you take a loan of Rs. 1 Lakh to buy your bike and then pay Rs. 1.15 Lakh in the next 12 months.

Become Your Own Banker

With Faltu Kharcha Fund, you may start depositing Rs. 9,000 every month and in 10 months you will have Rs. 90,000 + interest income. You did not pay interest to the bank but received interest income on your savings.

Rule 4 – Use Credit Card with Responsibility

For all your unavoidable and avoidable expenses you can use credit cards instead of paying through cash, UPI, debit card, or net banking because credit cards offer cashback, additional discounts and interest-free time periods to pay back for your expenses.

But, before that, you need to keep in mind that credit cards are not meant for impulsive purchases that are avoidable.

For example, don’t buy a pair of shoes while browsing for clothes online. That is impulsive buying when you already have shoes.

You need to use credit cards for your regular purchases that are unavoidable.

You will learn more about credit cards in the next chapter “credit card management”.

Before that, complete this assignment – Find out your monthly avoidable & unavoidable expenses.

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