Dear Qualified Financial Advisor,
Over the past few years, I’ve been taking small steps to get my finances in order — like committing to a monthly budget, investing part of my savings, purchasing insurance. I’ve always been very disciplined with sticking to the plan, but more recently, I’ve been wanting to splurge on some luxuries. I hadn’t taken this into account earlier because my needs have always been pretty basic. This is changing now, and I wonder if I need to rework my financial plan to account for the lifestyle I want — or restrict my lifestyle based on my finances. How do I strike this balance?
A Dreamer on a Budget
Dear Dreamer on a Budget,
Thank you for sharing your query with us. It’s good to hear that you have taken a keen interest in managing your finances by taking steps to prepare your monthly budget, investing your savings and also purchasing insurance. I am also happy to hear that you have been disciplined in following the steps you had planned with regard to your personal finances.
With regard to your recent desire for splurging — spending on unplanned expenses — please know that you are just being normal. It is completely fine to splurge on ourselves. However, the frequency and quantum of splurging is what we should be aware of, as it is quite possible to go out of budget very easily.
You can start by having a short-term plan in place. To manage your finances well and without any guilt, you may want to prepare a budget for monthly, quarterly, semi-annual and annual timelines — our expenses can usually be broadly categorised as regular and irregular across these timeframes. This will help you prepare for irregular expenses like an annual or semi-annual vacation, vehicle maintenance, festival celebrations, children’s school or college fees, watching movies, dining out, etc. This exercise will help you understand the deviations in your monthly cashflows and identify months of higher spending, thereby allowing you to make appropriate provisions for the same.
For the long term, you will have to consider inflation on your total annual expenses and the average income hike you will receive, in order to calculate your annual surplus and invest it accordingly. You may find it helpful to include big financial milestones that may not be fulfilled through your surplus alone, like international vacations, purchasing a house, changing your vehicle, children’s education and marriage, your retirement expenses, and so on, based on how you want to upgrade your lifestyle.
If you find that all your future financial milestones can be achieved by utilising the surplus and the assets acquired over the period — including your post-retirement life — comfortably, then you can go ahead with your current aspirations. However, if you find that the financial corpus is getting exhausted earlier, then you may consider any of the following steps, to retain enough corpus during your retirement phase:
Reduce the purchase value of your financial milestones. If you planned to purchase a property of, say, ₹3 crore after seven years, you could check if purchasing property of a reduced value, like ₹1.5 crore instead, leaves enough corpus for the post-retirement phase.
Reduce the frequency of incurring expenses towards these milestones. If you plan to change your car or go on an international vacation that costs ₹10 lakh every three years, but you discover that your retirement corpus is insufficient, then you may want to re-evaluate that frequency — perhaps every five years instead.
Eliminate the milestone completely. If, even after taking these steps, the corpus is inadequate, then you may have to eliminate the milestone completely.
Explore alternatives. If eliminating the milestone is not possible, consider tightening your budget or look for additional sources of income generation.
I hope these ideas will help you manage your finances better. Do make sure to review your expenses and short-term milestones on an annual basis, at the very least.