4 easy steps to avoid financial stress

1. Clarity on income

Many a time the salaried person thinks that the CTC (Cost-to-Company) mentioned in the appointment letter divided by 12 will provide him the monthly income. Unfortunately it is not so.

There are so many deductions like taxes, EPF, company sponsored food, ESI, Gratutiy contribution, medical claim component, LTA, etc., which are deducted or can only be claimed. These effectively reduce the monthly income that will actually land in one's hands.

Also add the income that could come from other sources like spouse, rent, income from deposits, dividends from mutual funds, etc. Remember to add only the income that actually reaches you in cash.

Accrued but unrealized income (e.g. interest in a cumulative deposit which is your money but will actually reach your hands only at the time of maturity of the deposit) should not be added to monthly income for budgeting.

2. Track the Expenses

A list of 'all' expenses is to be made. Readymade charts and monthly indexed books are available which will help with this stage. A spreadsheet in a computer will add more muscle to the tracking.

Care should be taken to enter all expenses. Without entering the smallest of expenses (tea from the local grocer, bus ticket, barber shop expenses included) the process is incomplete.

The data entered is very important for analysis later. The advantage with pre-printed forms and using a computer spreadsheet is that, the entry itself can be made in different headings.

3. Current & targeted savings

The difference between the income and current expenses is the current savings. Simple.

But the current savings may or may not be enough to meet our future requirements.

Calculations on the need for investment and savings for different future requirements need to be calculated next. Priorities need to be set for achieving different requirements. Based on this the targeted savings can be got.

4. Planning the Expenses

The best way to plan your finances to gain maximum mileage and cope with very minimal or almost nil financial stress is to exclude your savings and investments, as in set it aside and don't consider that as income that you can spend.

Then use the remainder of the income only for all the expenses. Simply put, Income - Savings & Investments = Expenses

This is the next process step. Once you know the quantum to be saved and invested, you can peck on the different expenses to get the savings and investments in reality. This step is not a one-day or one-time effort. This has to be done repeatedly over a period of 3 to 6 months based on the individual's requirements and aspirations.

The step will also include ways to close off loans as soon as possible. Prioritizing among the loans so that there is savings in the interest paid out. Prioritizing based on the time available to achieve the goals, etc.

Providing for emergency expenses due to job loss, due to a medical emergency, for maintenance of equipments and vehicles, are also part of this stage. It has to be recognized that all these could be provided for only over a period of time.

The requirements for each family and individual are unique and have to be customized accordingly.