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Home / Money / Personal Finance /  Out of cash by month-end? Here's how to fix it

Bengaluru-based Karthik and Alpana (name changed), both software professionals in their late 20s, have a problem. They both have high incomes, they are paying EMIs for a home and they do a fair bit of eating out, partying and travelling. But, somehow, they always tend to run out of money even before the month ends and then there is a wait for their salaries. “We earn a lot but are left with little. It is the same story every month," they said.

Karthik and Alpana are doing what a lot of millennials do—living pay cheque to pay cheque. According to Charles Schwab, 59% of Americans were living pay cheque to pay cheque in 2019. There is no corresponding data for Indians, but the proportion of such Indians is likely to have gone up since the pandemic.

Living pay cheque to pay cheque is a problem because you will never have any surplus to save. “In the name of ‘living in the moment and not worrying about the future’, people are tending to ignore that bank accounts will not be credited with active income after retirement. Saving and investing are necessities to maintain a good lifestyle in the future as well," said Arijit Sen, a Sebi-registered investment adviser (Sebi-RIA) and co-founder of merrymind.in.

The good news is, with a fair bit of planning and discipline, it is possible to break out of living from pay cheque to pay cheque. But first, it is important to understand some common habits that lead to such a situation.We live in a society of instant gratification and spend money on things that might not have long-term value.

“Trying to live the way others are living is making it hard for one to get out of a pay cheque to pay cheque cycle," said Sen. The other common reason is the reckless use of credit cards to meet family expenses and spending money that you do not have. One can get out of this cycle, though. Here is how:

Make a budget: The first thing to do is to get back to basics. “Have a budget in place and get a grip on your cash flows," said Dilshad Billimoria, managing director, Dilzer Consultants Pvt. Ltd, a Sebi-RIA. A budget gives you an idea about several things like how much you need to meet household expenses, how much you can spend on lifestyle expenses, how much money goes towards your dependent children and/or parents, how much provision you need to make for insurance premiums and EMIs and the surplus you should be able to generate for investments. Next, it is critical to maintain monthly cash flows.

“This exercise will reflect how much is actually getting spent on specific heads of expenses. Compare actual cash flows with the family budget (already set) at least every three months," said Sen. According to Sen, setting a budget is the easy part; the struggle is to maintain the monthly cash flow and comparing the same with the family budget for critical analysis thereafter.

Cut down on expenses: You can cut down your expenses only when you know where you are spending your money. With a budget, you already know your spending. While you may not be able to reduce your basic expenses much, you can do a lot when it comes to lifestyle expenses. Sen suggests the ‘Five Why’ technique in this case. Described by Taiichi Ohno, the architect of the Toyota Production System in the 1950s, this method suggests asking why five times till one identifies the actual root of the problem. Similarly, before making a discretionary purchase, ask yourself five times why you need what you are buying. “Ask yourself why until the importance of a requirement is established. The answers reveal whether the requirement is really necessary," he said.

Ditch that credit card: A credit card has lots of benefits, but the dues need to be paid on time. Even if you are paying your dues on time, having to clear off big credit card dues every month can put a strain on your finances. If you are using a credit card, it is important to ensure that there is enough money in your account to pay off the dues right when you are making a purchase. In case you have to wait for your next month’s salary to pay the dues, it can be a problem. If you are having a problem paying of high credit card dues and rolling over credit card bills, “Don’t use one!" said Billimoria.

Manage your debt: “It’s good to have debt when it’s good debt like for an appreciating asset like a house or an education loan. They provide dual benefits of tax planning and ensure one can budget towards savings also," said Billimoria. However, follow the thumb rule that you should not spend more than 35% of your income on EMIs. “The primary step you need to take to come out of debt trap is to figure out how to budget and pay off debt," said Sen. Also, make it a point to avoid personal loans with high interest as much as possible.

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