Sunday, December 12, 2010

Managing Money

Money makes the world turn and go around - all of us agree to this oft-repeated statement. Money has the power to make us materially happy or unhappy (note the word materially... money can't guarantee real happiness!). Knowing the techniques that help us in earning money, spending money and most importantly saving money is what is required for managing money effectively.

Earning Money

Earning money at a personal level can be equated to the earning of revenues by a business organization. It's a measure of cash inflow into Me, Inc.

How much one can earn depends on many factors such as one's educational qualifications, effective job experience, kind and nature of job performed, sector or area of economy where one works, etc. It also depends on the prevailing economic conditions.

In addition to what one can earn through a regular job, one can start individual-based ventures or small business to augment the income.

Some of the ways in which one can earn additional money while continuing in the current job are:
  • buy residential or residential property and earn a certain income through rent or lease
  • start a shop or commercial establishment and hire people to run it for you
  • do temping - part-time or freelancing jobs
The ultimate way to earn money is to have one's own full-time business or company. This approach, however, has many associated risks. This approach is not for everyone but only those who have entrepreneurial qualities. Only if one has adequate skills in Entrepreneurship one should consider this approach.

Spending Money

Spending money at a personal level can be equated to the incurring of expenses by a business organization. It's a measure of cash outflow from Me, Inc.

How much one needs to spend depends on many factors such as one's socio-economic status, effective lifestyle, family commitments, personal choices, etc.

In addition to what one needs to spend on a regular basis (on paying utility bills, groceries, travel, phone calls, etc.) one may also need to spend on big-ticket items occasionally such as buying electronic gadgets, buying a car, etc.

Unnecessary and impulsive spending should be avoided completely. Planned spending which includes bulk purchasing, discount shopping and bargain hunting are good techniques to follow in all situations.

Another major area in spending money that requires constant vigil and absolute discipline is managing one's EMI on a big-ticket purchase. EMI becomes part of one's regular spending like the utility bills and deafults in its payment carry heavy financial penalty. Out of all EMIs, home loan EMI is generally the biggest one for most of us and hence Managing Home Loan EMI should get the right level of attention.

Saving Money

This is the most crucial aspect of managing money. One difference between business organizations and individuals is that while business organizations get taxed on the Gross Profit (the amount abusiness organization has at its disposal after deducting the expenses from the earned revenue), individuals get taxed on the Revenue (the amount an individual earns through salary and other means).

Saving money assures that as an individual you can comfortably handle cash requirements:
  • During the times of need – in this context, the insurance premiums are saving towards contingencies such as untimely death, accidents, critical illnesses, etc.
  • During the time of major purchases such as home, car, expensive electronic gadgets, household items, tourism packages, marriage of children, etc.
  • During the time one is unemployed and retired - retirement is a certainty (especially if you don't have your own business or company) and unemployment is a harsh reality of today's business world.
One should define and religiously follow a Savings and Investment strategy to take care of this aspect of managing money. This strategy should vary depending on one's age, current and projected financial health, existing financial assets and liabilities.

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