7 Money Management Rules That Can Change Your Life
- CA Bhavesh Jhalawadia
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- Posted on
Insights from Sonu Sharma
There is a famous story about J. Paul Getty, an American businessman who was once the richest man in the world. One evening after World War II, he took three guests to dinner at a restaurant. Upon arriving, he suggested they take a walk before entering. One friend complained of hunger, but Getty insisted. Why? Because it wasn’t 10:00 PM yet. Before 10 PM, the restaurant charged a cover fee of 10 shillings per person; after 10 PM, that charge was waived. Even as the richest man on earth, he refused to waste money unnecessarily.
The moral is simple: Earning money is a skill, but spending money is an art. You can learn a thousand ways to earn, but if you don’t know how to spend, it is like pouring water into a bucket full of holes—it will never fill up.
Here are the 7 Golden Rules (Hacks) of money management to fix those holes in your financial bucket.
1. The Hourly Wage Rule: Weigh Your Expenses
We don’t become poor because of what we earn; we become poor because of how we spend. To control your spending, change how you view price tags.
The Strategy:
Whenever you want to buy something—say, a gadget worth ₹5,000—weigh it against your effort.
- Calculate your hourly rate: If you earn ₹50,000 a month working 8 hours a day for 26 days (approx. 200 hours), your value is ₹250 per hour.
- The Conversion: That ₹5,000 gadget actually costs you 20 hours of hard labor.
Ask yourself: Is this item worth scrubbing and slaving away for 20 hours? If the answer is yes, buy it. If not, walk away.
2. Smart Shopping Habits
Middle-class families often lose the most money during routine shopping. To stop the leakage, follow these strict protocols:
- Never shop without a list: If it’s not on the paper, it doesn’t go in the cart.
- Go alone: Avoid taking your spouse or children. Spouses may suggest unnecessary add-ons (“Should we get this too?”), and children will guilt you into buying emotional treats.
- Set a timer: Decide that you will finish shopping in one hour. The longer you stroll, the more you spend.
- Don’t shop on an empty stomach: Hunger makes you buy more food than you need.
- Shop at the end of the month: Try shopping around the 25th, not the 1st. When your bank balance is lower, your brain naturally becomes more frugal.
Important Exception: Never cut costs on three things: Health, Education, and Quality Food. Saving money here leads to massive losses (hospital bills or lack of career growth) in the future.
3. Tax Planning and Insurance
Tax is likely the biggest expense of your life. Do not evade tax, but plan it legally. Consult a Chartered Accountant (CA) to find government-approved ways to save tax.
Furthermore, protect your family with insurance, but be careful:
- Term Insurance Only: Avoid “Money Back” or “Endowment” policies. They mix insurance with investment and offer poor returns on both.
- The Rule of Thumb: A ₹1 Crore term plan is affordable (e.g., ₹473/month), whereas a money-back policy for the same cover is 10-20 times more expensive.
- Coverage: Your insurance cover should be at least 10 times your annual income.
4. The Car Buying Rule (20:4:10)
Buying a car is a major financial decision that traps many people in bad debt. Follow the 20:4:10 Rule:
- 20% Down Payment: Never pay less than 20% upfront.
- 4 Years: Never finance a car for more than 4 years. (Avoid 7-year loans even if offered).
- 10% EMI: Your monthly car payment should never exceed 10% of your monthly income.
The Golden Price Limit: The total price of your car should never be more than 50% of your annual income. If you earn ₹20 Lakhs a year, your car should not cost more than ₹10 Lakhs.
5. The Power of Compound Interest (Stop Bad Habits)
Small habits drain your wealth, while compound interest builds it.
Consider the habit of smoking. If you smoke cigarettes worth ₹100 daily, you are burning ₹40,000 a year.
- If you stop smoking and invest that ₹40,000 annually in a SIP (Systematic Investment Plan) with a modest 10% return.
- In 40 years, that money will grow to over ₹2 Crores.
By quitting one bad habit, you gain better health and become a multi-millionaire.
6. Manage Your Debt: Good vs. Bad Loans
Not all debt is bad. You must distinguish between the two:
- Good Debt: A loan taken for an asset that increases in value (e.g., a home loan).
- Bad Debt: A loan taken for an asset that decreases in value or for consumption (e.g., credit cards, loans for weddings, travel, or luxury clothes).
The Rule: If you cannot afford it in cash, do not buy it on credit. “Buy now, pay later” schemes are wealth destroyers.
7. Stop Showing Off
Finally, stop trying to impress people. As humans, we have a tendency to “show off” the moment we get money. We buy things we don’t need, with money we don’t have, to impress people we don’t even like.
- The Rich vs. The Poor: Truly rich people rarely try to impress others. It is usually those with less money who are desperate to look rich.
- The Windfall Rule: If you suddenly receive a large sum of money (bonus, lottery, profit), do not touch it. Put it in a Fixed Deposit (FD) for 3-4 months. Let the initial excitement settle so you can make a rational decision. 95% of people blow a windfall within 3 years because they lack patience.
Conclusion
Money is a tool. If you learn to control it using these seven rules, it will serve you well. If you let it control you, you will always be struggling. Start by fixing the leaks in your bucket today.