Expenses that recur on a regular basis (like insurance premiums) are known quantities. However, there are a few that may be seen as discretionary, like buying a new mobile phone. The deciding element here is that the expense comes on a timetable less frequent than once a month. Rent, mobile phone, Netflix, EMI, and other recurrent obligations are all paid with the monthly salary.
How can we put aside funds to cover regular expenses?
Using the aforementioned expenditures as examples, jot down all of your regular expenses. After translating to annual values, tally up their sums. Insurance premiums and other yearly costs may be included immediately, and quarterly expenses, such as building maintenance, can be multiplied by four to account for the whole year. If you spend three lakhs on a vacation every two years, for instance, that’s the same as spending one and a half lakhs every year. You should know about the examples of periodic expenses in 2023 also there.
Where can I get the most bang for my buck when it comes to monthly expenses?
Divide the total annual cost by 12 to begin. This calculation will tell you how much of your salary you should put away per month.
It’s possible that this may include even one-time costs. If you’re planning on making a significant purchase, like a car, and you haven’t done so in the last few years, you should add an extra amount to your monthly sinking fund contribution until you have the whole amount. Your monthly amount will need to be recalculated if your spending habits change over time.
A sinking fund, which is an account in which you save money on a regular basis, is distinct from your long-term goals (retirement, the education of your children, etc.) and your emergency fund (for things like losing your job, having automobile difficulties, or needing medical attention, etc.). Use the result of your step 3 calculation to establish a routine for investing in a liquid fund. You may open a savings account specifically for retirement planning if you decide that investing in mutual funds is not the best course of action for you. The interest on a savings account is meaningless since the amount you would be saving is such a tiny fraction of your total wealth. This mutual fund folio serves as a convenient shorthand for the sinking fund. However, you should avoid putting this money in the stock market since you will soon need this money and cannot afford to lose any of it even if the stock market sees a dramatic downturn.
Why is it beneficial to set away funds in this way?
Without a sinking fund, major expenses like insurance premiums may quickly eat away at your cash flow. To begin, there is always enough money for the things you need to buy or spend money on.
Conclusion
Second, you may be certain that your regular bills won’t increase by any large amounts. If you don’t have a sinking fund, big bills like insurance premiums may really throw a wrench into your monthly finances. Using a credit card may end up being your only option. However, interest payments will be quite costly if the balance is not paid in full before the end of the cycle.
