How to do Money Management?

Background – How to do Money Management:

The first step in Financial Planning is Money Management. You should know how to do money management and record each rupee earned and spent . What is your current financial position i.e. status of your assets and liabilities. You may be thinking that I am not big businessman and do not have huge income source though I have to keep record of income, expense , assets and liabilities ? Answer is yes ,because it is not material how much you earn per month whether it is Rs. 1 Lakhs or 10 Lakhs . Important part is to have habit of record keeping.

Monthly Cash Flow Position:

First step is how your monthly fund flow position is . Whether you are having saving for a month after incurring expenditure for a month or you are in negative i.e. you have to take loan to finance your monthly expense.

Record Keeping:

If you are keeping record of high level categories of income and expense for a month , you will get all required data points to analyse trend and compare it with your budget.For example, you have planned to spend Rs. 20,000 a month on Grocery which can be grouped under Daily Living, you will get idea about each item. You will know whether you are spending actually Rs.19,000 or Rs.23,000 a month. Normally people is having habit of keeping everything in mind or at finger tip however if you put this on excel sheet , it will work as miracle .

Financial Planning Template:

Following easy to understand Financial Planning template is provided to record income , expense and Investment. This is is prepared for a month of April . You can follow same approach for remaining months and compare it with budget. Further you can break each income and expenses in further sub-categories as provided in bracket. Ideally if you don’t miss out any of income , expenses and investment amount for the month ,total of balance as per your bank statement should be Rs.30,000 as mentioned in Sr.No.6 below . I know this will be very difficult and time taking exercise but trust me once you start maintaining it , you will be familiar with it .

Analysis based on record keeping :

More data points you have, more analysis you can do with it. This will help in timely decision . You can see in above table that total expenses for the month is 50% of income received during the year . Out of total expenses say you are spending 20,000 on Loan , it will give you details that you are spending 20% on Loan . You are investing 40% out of income earned during the month . Based on your risk profile , you can decide mode of investment and allocate this amount internally in equity, fixed income, gold or real estate.

Personal Assets and Liabilities Statement:

In same way you should record your personal Assets and liabilities for the month. You can maintain separate sheet for each of asset/liability In case of assets, please mention Investment amount along with market value/quoted price and in case of Liabilities , please mention Outstanding liabilities . In case of Insurance, Insurance fund value and accumulated bonus should be included. Insurance policy also provide death, accidental and other benefits which should be tracked separately .

*Reduce Market Value of Asset from Liabilities to get Net Asset

Summary- How to do Money Management:

Money Management Process starts with recording of monthly Income, Expenses , Investment . Followed by recording personal asset and liabilities statement. To get figure of Net worth , we have to reduce market value of asset minus liabilities . Recording asset and liabilities helps us in portfolio management and in asset allocation. For example , you can decide to restrict total allocation in equity as 40% of total Assets . If you don’t prepare such statement and not track month on month basis, you will not get clue about asset allocation and to take necessary steps in this regard. Do give your comment regarding this article in comment box below.

Read our below post to get idea about Financial Planning:

What is Financial Planning ?