Expenses and Savings

Expenses exceeding income is a universal problem. Most advice from the financial community is centered on savings and investment. Individual investors also seem obsessed with maximizing income Reams are written on life insurance, medical insurance, accident insurance and so on. But expenses are a whole different kind and that few seem interested in watching. Most financial plans crash not because of lack of income or savings but because of the crushing burden of expenses.

Expenses are a critical area. Some people run a household for less than Rs 5,000 a month, while others who struggle to limit their expenses to five figures. There are those with modest means who somehow seem save up enough to educate their children, get them married, and yet live a comfortable life. And then there are those who have been successful in life, but who nevertheless lurch along from one financial crisis to the next. The difference could be their expenses.

The best way to control expenses is to postpone them to a suitable period. There is a time and place for every expense. Incurring an expense out of place is what creates lots of problems. Determent of gratification is a sure fore way to stretch income and improve savings. This ensures that there is a proper gap between income and expenses, and provides the cushion that one needs in case of a spike in expenses. Just as we expect a good clearance between the floor and the ceiling we should have one for expenses and income. They should not be too close for comfort. The wider the difference, the more comfortable one will be.

In many cases, expenses inflate because people take loans at the drop of a hat, to live the good life for a house, car, consumer durables, holidays and so on. Loan repayments clog the cash flow pipe, as they entail recurring expenses.

So is there a way to measure how much expense one should incur every month? How much to save month after month? There are expenses by themselves or savings by themselves which cannot be termed as high or low. They should be seen in connection with each other, and not in connection with income as is generally believed.

Take the case of an individual ‘C’. He earns Rs 50,000 a month, and spends about 30,000 savings Rs 20,000. His friend Q earns about Rs 1.25 lakh, spends Rs 85,000 and saves Rs 40,000 each month. Even though Q saves twice as much as C, C is better off. Why? Because, C’s savings will cover expenses for 20 days while Q’s savings will last only for 14 days. That comes from the savings / expenses ratio, which is 0.67 for C, and 0.47 for Q.

From this, it is evident that one can control their financial well being by keeping a tight leash on expenses. Income doesn’t matter. A savings-to-expenses ratio of one or more is a sure sign things are going right, especially if one reaches this number in the first half of his working life. If it is less than that, it’s a warning signal, and it would be a good idea to take stock of ones finances. Of course, these are only rough indicators, mere sign posts to show whether one is going in the right direction. Well begun is half done, as the saying goes. Neglecting to look at expenses is expensive.

Most successful savers are not misers but they make ‘savings’ their habit by timely spending or not spending the money. The also budget their expenses in relation to their income and invest the savings in productive investment and tax saving schemes.

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