How you can organise your Annual Expenses and earn an extra buck too….

It is easy to budget for monthly expenses as they are fairly predictable and can be funded out of latest month’s salary income. But we usually lose sight of the expenses that hit once or twice a year and pay attention to it only when it is due. 

Typically, the annual expenses incurred are children’s school fees, vacation expenses, festival expenses, gym membership, insurance premiums, etc. These are usually spread throughout the year. For e.g, your children’s school fees could be due in June, your gym membership in September, your insurance premium in February and so on. And then there are one time unpredictable expenses too which entail untimely cash outflow like home repairs or computer repairs. (In just less than a year, I spent about Rs.6,000 bucks on my laptop repair) 

For those who have abundant funds, the usual tendency is to fund one-time requirement from the past salary earnings which in most cases is lying idle for many months in savings account. 

And for those who live on a tight budget or are overtly spend thrift, they may be unprepared for it. They may fall short of funds to cover an annual expense, forced to charge it on credit card or may have to dip into long term investments.

But there is a wonderful way to organise your annual expenses.

Firstly, ascertain the cost of each annual expense & their respective timelines by looking into past bank or personal records. Be realistic in estimating your expenses. Convert it into a monthly figure by dividing by 12. This would help you to ascertain the monthly amount you need to keep aside to create the specific corpus. You can create FDs/RDs/liquid funds for each specific expense for the desired time frame. For instance, you can create a school fees fund for your children by opening a fixed deposit or investing a regular amount in recurring deposit. At the time of payment date, you would have the fund ready plus some extra buck as interest which you can utilise for your children’s tuition fees or some other expenses.

The benefits of saving & earmarking specific expenses to specific funds for a specific time frame are that:

(1) It would ensure that the big fund would be there when you need it. You would not have to scramble for cash at the last hour or resort to loan or disturb your long term savings.

(2) It would help you to remain disciplined to manage even the monthly budget as you would compulsorily be keeping aside a certain amount for your annual expense need. Think of the monthly amount to be compulsorily saved as your monthly SIP investment or home loan EMI and you would sure shot meet your annual requirement in a disciplined manner. The exercise would also automatically set the limit for expenses like vacation where you are tempted to go overboard in spending.

(3) The monthly saving that you would invest will also be growing & earning money for you until you need it.

(4) And the best part is zero stress. You would feel immense freedom to spend the money you have saved as you had already budgeted and arranged for it. 

Do you have any other method that you follow? Anything that works for you. Let me know your suggestions.   

My interaction with a personal banker….

While I had heard many stories of rampant misselling of financial products, I was not really aware of the brazenness with which it was done. Until, one fine afternoon, I had a conversation with a personal banker. 

I had gone to the bank with my husband to liquidate a fixed deposit which was in our joint name. While the banker was taking care of the procedural formalities, he casually slipped in the topic of how fixed deposits earn low returns post tax for the highest tax bracket earners. He then went on to mention that the bank had a better product which can earn higher than FDs & that too, tax-free guaranteed returns.

Besides PPF, I had not heard of any such product. I decided to lend him a humble ear without disclosing my financial planning background. Here is how the conversation went: 

Banker: Madam, instead of putting your money in FD, you can invest every year for 7 years in our product which can earn you 8-8.5% guaranteed tax free returns

Me: What is that product?

Banker: It is a debt product. It will invest a major portion of your funds in government securities. Last year, it yielded about 8.5-9% returns

Me: Is this a debt mutual fund product?

Banker: No

Me: Aren't G-sec yields linked to general interest rates and the liquidity in the markets? Then how can your product assure guaranteed returns

Banker: No madam, the returns are not guaranteed (contradicting his earlier statement), but over the past one year, it has yielded good returns and going is expected to remain good

(I was wondering how it would sustain over a long period of time especially since the interest rate cycle after peaking out had gradually reversed over the past one year. Till this time, I am not told what kind of a product the banker was talking about.)

Banker: Plus, you also get a free life insurance cover! And, you get your investment plus bonuses back after maturity of 10 years

Me: Are you talking about limited pay endowment insurance plan?

Banker: Madam, nowadays you get free insurance cover with everything, even if you buy debit card/credit card…!

I was quite taken aback with the answer and I found it meaningless to further continue the conversation. I realised that these people would always find a convenient way to camouflage a product (which is already complex) without ever addressing the genuine needs of customers.

Finally, I refused him politely stating that we have adequate insurance cover with a term insurance plan & we do not prefer to mix insurance with investments. The interesting part of this entire conversation was that the banker had not disclosed the name of the product. At the time of leaving, I did ask its complete name and the banker finally obliged.

Later, I checked the details of the product on the insurance company’s website and confirmed that it was a traditional endowment assurance plan.  I also calculated the returns and it came to a pathetic 6.5 per cent for a policy term of 10 years! I am not saying that all endowment insurance plans are bad. Few may be good and may be suitable for a certain section of people. But in most cases I have come across, people are better off investing in other options.  

You must have heard of the ‘KISS’ principle – “Keep it Simple, Stupid”. You can apply this rule to your personal finance life. Avoid getting into complex products like ULIPS, Endowment plans, Money Back plans, etc. Instead, buy a term plan with adequate life insurance cover for your family, buy adequate health insurance and invest in PPF, mutual funds & a certain amount in gold. Trust me, by doing only this, you would have won half the battle in keeping your financial life on track!