Here are the 12 commandments of finance! I seriously don’t know if there should be only 10 or 11. This is dedicated to all the people from whom I have learnt about money — could be my parents, siblings, cousins, teachers, students, grocer, taxi driver... So, here are the commandments:
Spend much lesser than you earn. Try to save or invest 20-30 per cent of your take-home salary. If you think it is difficult, try your best to reach this figure as soon as possible.
Keep your housing cost low. Remember the rules in the 1980s? Your EMI should be less than 30 per cent of your SINGLE income or 20 per cent of your joint income. This is because if one income stops, you still have some cushion. Most Indian cities are so expensive that people tend to over-commit and then suffer if income drops.
If you live on rent, your rent should be 20 per cent of your net take-home salary.
Never go shopping without a shopping list, and stick to it. As far as possible, use cash; it is painful to part with cash, but easy to sign. Whether it is 700 or 7,000 or 70,000 it doesn’t matter. But while paying cash, you will pause and think.
Your mortgage should be less than 3x your CTC. If both of you are working, then maybe 4x. But surely not more than 4x. Buy a smaller house if you must, but stick to this number like glue.
You may or may not need a car. Taking a taxi works fine for me. However, if you must buy, buy a second-hand car. Fix a price; say you buy a car for Rs 6 lakh, use it for four years and sell it off for Rs 2 lakh. This means that the car cost you Rs 1 lakh per year of usage. Buy the car with full own cash. That’s the way to keep costs low.
Monitor your net worth. Net worth means assets working for you minus liabilities. That means you should not include the house you live, but should include your home mortgage. Make sure that you are earning at least 7 per cent on your net worth, including your house. Tough ask? At least 6 per cent, if not 7, should be your target.
If the commitment is for a long time, and it is a regular payment, think of the TOTAL commitment, not just the first instalment. When you buy a fridge for Rs 30,000, it is just a one-time commitment. However, if you buy a unit-linked plan paying Rs 50,000 per month, a 30-year product is a commitment of Rs 1.8 crore, and an opportunity to create Rs 20 crore. And that’s huge!
If you don’t understand, say NO to a product offered to you. AIF, PMS, REIT... Total no. Complete no.
Pay off the debt, highest interest first. And pay off as soon as possible!
Budget all big things and don’t buy if you did not think it was needed at the start of the year.
Think of your earnings per day or per month. See how much you pay for other services vis-a-vis how much you earn. If you are earning Rs 1,000 per hour, think whether it is worth bargaining with a vegetable vendor for Rs 10 by spending 10 minutes! Surely not.