When small is big

MONEY MATTERS

Minor daily expenses can hit your finances drastically. It's time to take stock of your financial health.

Vivek Bhatia, 32, a professional banker, earns Rs 15 lakh a year, but his bank balance does not reflect that. He is living from one salary to another. This is despite the fact that his wife also takes home a cool Rs 10 lakh.

Bhatia constantly laments the rise in the cost of living that is leaving him penniless. His wife Sandhya disagrees.

She feels that cutting down on his daily double pack of Gold Flake, three pegs of Haig whisky and weekly dinners would help them to save much more. "Oh, that is barely Rs 2,000 or Rs 3,000 a week. Stop penny pinching now," argues Bhatia.

Tired of this constant fund crunch, the family decided to sit down one day and work on their monthly inflows and outflows.

Overall things looked fine. There were very common outflows such as a home loan equated monthly instalment(EMI), daughter's school and tuition fees, grocery, transportation, utility, entertainment and vacation.

But, the numbers were not adding up. Then, Sandhya hinted at adding the other expenses like parties, cigarettes, alcohol and dinners. And the numbers began to add up slowly.

An expense of "barely Rs 2,000 to Rs 3,000 a week" translated to over Rs 20,000 a month. His monthly whisky intake was costing him around Rs 8,000, the cancer sticks, another Rs 2,400.

A couple of dinners at Rs 1,500 week, a weekly movie and some shopping were all adding up to Rs 21,200 a month. This was excluding the vacation and other lifestyle expenses which the family incurred. And this 'penny pinching' was costing the Bhatia family over a couple of lakhs every year.

Let us see how much savings he could achieve if some of these leakages were cut by half and invested in instruments that would give 12 per cent returns per annum. The ten year returns are almost Rs 32 lakh and 20 year, an impressive Rs 1.36 crore.

Plugging these expenses is extremely important. Some typical sources of financial leaks that most people are exposed to are addictions such as cigarettes, alcohol, certain foods and aerated drinks.

Besides these, there are additional leakages, when you forget to shut off electrical equipment like heaters, air conditioners and geysers.

This is not to say that you cannot enjoy that movie or go for a party. But a little control should be exercised, especially in case of daily expenses. It is these expenses that hit your bank balances more.

The worst part is, like Bhatia, you seldom keep account of them because they seem too low when compared with say, buying a television or car.

Your lifestyle should match your current income, savings and financial situation. Even celebrities like Michael Jackson, Mike Tyson and more recently, Marion Jones have found the hard way that squandering your wealth can hurt... very seriously, at times.

The writer is director, My Financial Advisor