Up close, expenses may be an ugly picture

Spending. That necessary evil. Spend too little and you could end up torturing yourself. Spend too much and it could burn a hole in your pocket. How much should you spend? Mumbai-based Bhaven Udeshi, 32, would not track his expenses. Before he got married in 2012, at the end of every month, his bank balance neared zero, despite a monthly salary of about Rs60,000. He ate out almost every weekend; or even twice or thrice a week. And it didn’t help that he did not have any investments; not even tax-saving ones. “I used to spend about Rs 10,000 every month back then on just eating out and fine dining,” said Udeshi.

After he got married, he and his wife Archana, now 33, visited Kalpesh Ashar, a certified financial planner, to get their finances in order. Ashar had to do a surgery. “Apart from sensitising Bhaven about his eating out habits, I also noticed that he was also spending a lot on petrol for his car (Udeshi says it was “about Rs8,000-9,000 a month, driving 60 km a day”). I couldn’t have advised him to put a complete stop to eating out, but I put him on a budget and fixed a limit. He was not to spend beyond that,” said Ashar.

Many of us will be guilty of making the same mistakes as Udeshi. Thanks to mobile apps such as Swiggy, Zomato and Sootsy, it is easy to order food. But the costs creep up quietly. “People don’t keep a tab because everything is done on the card and the mobile phone. And before you know it, a systematic investment plan for a particular month gets rejected because there isn’t enough money in the bank account,” said Priya Sunder, co-founder, PeakAlpha Investment Services Ltd, a Bengaluru-based financial planning firm.

Get a hold

Financial planners suggest a break-up of all expenses into two heads; discretionary and non-discretionary. Bengaluru-based financial adviser Mrin Agarwal, who conducts financial literacy workshops for women under Womantra, said she asks people how much they spend on movies, online shopping and where they can cut down on. “People are actually shocked when we show them that they can cut down by about, say, Rs5,000,” said Agarwal.

When you begin a relationship with a financial planner, she asks you a number of questions. From ascertaining your asset allocation, financial goals, income and your likes and dislikes, she also asks you to list down all your expenses. This is where it gets tedious. From your monthly expenses like groceries, eating out, movies, domestic help’s pay, rent and so on to your annual expenses like children’s education and holidays, you are asked to make a list.

“We want details, because different things grow at different rates. For instance, we account for school education to grow by 10% every year, fuel cost by 10%, medical grows higher at about 15%, and so on. Everything is broken down and aligned to the rate at which they are expected to grow,” said Sunder.

That’s hard work. Most financial planners say that new investors baulk at this exercise. Jaipur-based certified financial planner Hemant Beniwal said, “Some of them appreciate that we have asked this but half just share lump sum numbers. That does not mean they are spendthrift but it shows that budgeting seems boring to them.” He gives an example of a Dubai-based client whose expenses shot up by 30% in just one month. A close scrutiny showed that the client had not properly accounted for his expenses in the first place.

While some people worry about how much they are spending, some do not bother. D. Muthukrishnan, a Chennai-based certified financial planner, cited the example of a young couple in their 20s who had sought his advice in planning their finances. The couple had a lavish lifestyle and were comfortable living off credit, by paying just the minimum balance due on their credit card, every month. Muthukrishnan said that although their combined salary was Rs1.20 lakh per month, their lifestyle was much beyond that. Among the measures he suggested was to start saving at least 25-30% of their income. Did it work? “No. It was going over their head. They were happily giggling; they didn’t come back,” he said.

Not just expenses

In addition to the monthly expenses, keep an eye on those annual expenses, like school fees. Some of these are non-negotiable and when added up, can come up to a large number.

Also watch out for equated monthly expenses (EMI) and insurance premiums. Ashar recollects one client who had come to him in 2012. She used to earn about Rs6 lakh a year, and pay Rs3 lakh of that as insurance premiums for several insurance policies. She was unmarried, had no successors and her parents, who were in their 70s, were financially independent. “It took me a full year to dispose of her policies. Ironically, none of which were term plans,” he said. Even after paying the surrender value, the money she got was “newfound capital for investments” said Ashar.

We may have poked fun at our parents’ habit of recording daily expenses. But but it’s a good habit to keep a track. Make broad—and as many as possible—expense heads. There are many mobile apps that scan your text messages to give you a break-up of your expenses. Alternatively, a good old Excel sheet works just as well. You’ll be surprised at the results.