When I first began earning money, the biggest question I had was simple: where do I start with managing my finances? This is a common concern I've encountered among many peers. The challenge isn't a lack of information—rather, it's the overwhelming sea of financial advice from countless experts that makes it difficult to know which direction to take.
Through my own eight-year financial journey, I've discovered a practical game plan that anyone can follow to make sense of their money without feeling overwhelmed. Regardless of your income level, these steps can help you reassess your financial situation and make smarter decisions. This approach has helped me achieve greater financial security in the past two years than during the first six years of my career.
Disclaimer: I'm not a financial advisor, and I'm not recommending specific investments. My goal is to help you understand your money and manage it confidently. This is the guide I wish someone had created for me when I first started earning.
Step 1: Calculate Your Monthly Expenses
The first step is to determine how much you spend (or would spend) in an average month. Understanding where your money goes is essential for fulfilling your financial goals and spending wisely.
There are two types of expenses:
- Fixed Expenses: These are consistent monthly payments such as rent, mortgage payments, EMIs, subscriptions, utility bills, phone bills, and internet. While the exact amounts might fluctuate slightly, these expenses will always be present.
- Fluctuating Expenses: These vary month to month, including groceries, household items, entertainment (movies, dining out, social activities), and other discretionary spending.
Take an hour to review your recent bank statements, UPI transactions, and cash expenditures. Track everything you've spent money on in the past month and categorize these expenses as either fixed or fluctuating.
For example, my fixed expenses include rent, utilities, business subscriptions, and employee salaries. My fluctuating expenses include food delivery, dining out, grooming services, and entertainment subscriptions. The key difference is that I could eliminate fluctuating expenses without significantly impacting my life.
Tracking expenses serves two purposes:
- Understanding how much you need to earn to cover expenses while having money left for savings and investments
- Monitoring spending habits to build good financial practices and avoid overspending
A good rule of thumb: your combined expenses should not exceed 80% of your income. Aim for 50% on core expenses, 30% on discretionary spending, and 20% for savings and investments. If you don't follow this rule, especially at lower income levels, you risk spending all your money on expenses as costs rise faster than income, creating a dangerous cycle.
Step 2: Create a Budget
A solid budget helps manage your finances, prevents overspending, and ensures you're saving for the future. You can be as detailed as you want with your budget, using tools like ET Money, Excel spreadsheets, or even manual tracking.
I prefer the 50-30-20 rule, which is the simplest approach to budgeting:
- 50% of income for fixed expenses
- 30% for variable expenses and wants
- 20% for savings and investments
As your income increases, your expenses shouldn't rise proportionally. Ideally, your savings and investment percentages should increase while your expense percentage remains stable or decreases.
After trying various budgeting apps and spreadsheets, I found the most effective method was creating three separate bank accounts:
- One for expenses - all spending comes from this account
- One for wants and desires (30%)
- One for savings and investments (20%)
For salaried individuals, you can divide your monthly paycheck across these three accounts. For those with variable income like myself, apply this rule each time you receive payment from any source. This allows for intuitive budgeting without tracking every transaction.
Step 3: Build an Emergency Fund
This is where actual money management begins. Financial hardships can happen to anyone at any time, and being prepared is the only solution.
I learned about emergency funds later than I should have. Previously, I lived in constant fear of losing my job because I had no financial safety net. An emergency fund provides mental peace, knowing you have resources if something goes wrong.
Ideally, your emergency fund should cover 3-6 months of living expenses. Start with 3 months when you're beginning, then build up to 6 months as your income increases. For example, if your monthly expenses are ₹30,000, your initial emergency fund goal would be ₹90,000, eventually increasing to ₹1,80,000.
This money should be kept separate from your regular expenses account but still remain accessible. I use a goal-based saving instrument called iWish from ICICI Bank, which functions like a recurring deposit or FD, offering around 6% interest with the ability to withdraw when needed. The key is having this money accessible but not easily spendable on impulse purchases.
Remember, this fund is strictly for true emergencies like medical situations, accidents, or replacing essential stolen items—not for shopping sprees or routine credit card payments.
Step 4: Get Health Insurance
Healthcare costs rise by 5-7% annually, at minimum. Many people avoid medical care due to cost concerns, resorting to home remedies instead of seeing doctors—a potentially dangerous practice. Health insurance is crucial for covering unexpected medical expenses.
If you work for a larger company, you may receive employer-provided health insurance. Take time to understand what this plan covers, including coverage amounts, approved hospitals, and exclusions. If there are significant gaps in coverage, consider supplementing with a private health insurance plan for you and your family.
Health insurance plans start from as low as ₹500 monthly. While it's tempting to choose the most basic option, pay attention to terms and conditions. Look for a plan with good coverage and access to quality hospitals nationwide. You can pay premiums annually or in installments. Compare options on sites like Policy Bazaar before making a decision.
The earlier you get health insurance, the lower your premiums will be, as younger individuals typically pose lower mortality risks.
Step 5: Save for Your Goals
After establishing your emergency fund, begin saving for specific goals. These can be short-term (like taking a vacation) or long-term (like buying a house). The best way to achieve these goals is to deliberately save for them, preventing sudden financial strain when it's time to act.
Keep this separate from your emergency fund. If you determine you need ₹3 lakh for a European trip, start saving a portion of your income regularly to reach that goal.
For short-term goals (within 3 months), I use goal-based deposits rather than investments. For such brief periods, investments are impractical due to short-term capital gains taxes. For long-term goals, however, investments are preferable, as compound interest allows your money to grow substantially over time.
Step 6: Pay Off Debt
Once you've established your emergency fund and begun saving for goals, focus on paying off any debt—loans, credit cards, or other financial obligations. While it may not be possible to clear all debt at once, prioritize high-interest debt first (typically credit cards with 18%+ interest rates), followed by lower-interest debt.
For example, if you have both a personal loan at 12% interest and an education loan at 6%, prioritize the personal loan. Missing payments accumulates more debt as unpaid interest becomes additional debt. This affects your credit score, impacting your future borrowing capabilities and increasing your total repayment amount.
Step 7: Invest for the Future
Research shows many women avoid investing due to fear. With the wage gap already causing women to earn less than men on average, lower financial literacy and investment participation further widens the wealth disparity.
To truly build wealth and achieve financial independence, you must invest. Inflation increases prices of goods and services by 5-7% annually, but your income may not rise at the same rate. If your money isn't growing faster than inflation, you'll remain trapped in the cycle of trading time for money.
There are two primary investment categories:
- Stocks/Equity: These represent ownership pieces of companies. They typically offer higher returns but come with higher risk, as their value can decrease or even disappear if the company fails.
- Debt Funds: These instruments involve lending money to companies or the government in exchange for interest. They're generally more secure than stocks but offer lower returns.
To mitigate risk while investing in stocks, consider mutual funds—collections of different stocks that spread risk across multiple companies. If two companies in a fund of 200 fail, the growth of the other 198 can balance the losses. This diversification ("not putting all your eggs in one basket") is achieved through index funds, ETFs, and various mutual fund types.
A good rule for balancing equity and debt investments: subtract your age from 100. The result is the percentage you might consider allocating to equity investments. For example, if you're 25, you might invest 75% in equity and 25% in debt instruments. As you age, gradually shift more money to safer debt instruments.
You can invest through DIY platforms like ET Money, Groww, or Zerodha, which provide detailed analysis of mutual funds' historical performance and expert recommendations. Alternatively, consult financial advisors through banks or CAs for personalized guidance.
Never invest based solely on hearsay or because friends are investing in something. Consider your age, risk capacity, income, and expenses before making investment decisions.
Two specific investments to consider:
- ELSS Mutual Funds: These tax-saving mutual funds provide tax exemptions up to ₹1.5 lakh under Section 80C in India. They typically have a three-year lock-in period.
- Retirement Funds/Plans: Retirement funds are long-term mutual funds with higher interest rates but market-dependent risks. Retirement plans combine pension and life insurance elements, requiring regular payments for a set period in exchange for regular income later.
Step 8: File Tax Returns and Review Investments
Even if you earn less than the taxable threshold (currently ₹3 lakh annually in India), file income tax returns as soon as you start earning. This practice provides documentation that helps with visa applications, passport processes, credit card applications, and other situations requiring proof of income.
Consider hiring a CA to handle your tax filing, especially if you're self-employed. If you're employed, much of your tax information may be automatically populated through your employer's records.
Regularly review your investments and replenish any depleted funds. I save in different mutual funds for specific goals, such as annual travel. After using money from these funds, I make sure to replenish them. Similarly, if you use your emergency fund, make it a priority to rebuild it.
Check your expenses quarterly, especially if you're a freelancer whose income can increase rapidly with new clients. The goal is to prevent lifestyle inflation—keeping expenses stable while income grows, allowing more money to flow toward savings and investments.
Conclusion
Money management is about making conscious choices, setting realistic goals, and taking consistent steps. While it may initially seem like hard work, once you establish these habits, they become seamless. By dividing your income into separate accounts for expenses, wants, and savings/investments, you'll stay on budget, document your finances, and secure your financial future.
If this approach to simplifying finances resonates with you, I'd love to hear your feedback and questions about other financial topics you'd like to explore.
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