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What is Fixed Monthly Expense?
This is the second component that we consider when planning using the Power of Three system.
As mentioned in the introduction, we divide monthly income into roughly 3 equal parts and this is, consequently, the second third of the break-up. This part covers costs/expenses that are absolutely needed by the individual per month. These would be expenses such as rent for the house, monthly cost for transport, electricity bills, cell phone bills, internet bills other such subscription-based expenses and so on.
How do I maintain a one-third Fixed Expense to monthly income Ratio?
For a newly salaried individual, there are very few avenues to trim these expenses. Since, most of these individuals end up living in metropolitan areas, either rent(both house and amenities like mobile and internet), food, transportation or a combination of these, turn out to be a very, very significant part of monthly expense. So, there are basically two broad ways that the ratio can be maintained, A. Increase Income (um Duh?) B. Reduce expense. Whichever route of the two the individual chooses to take, the goal is to absolutely make the Fixed Expense to Income ratio stay very close to a third.
What are my Options to optimize Fixed Monthly Expense?
Personally, when I started earning, taking the first route was pretty much out of the question in a period of the next couple of years at least. So, the latter method is what I chose to do until I was in a shape to improve my income. Actually, the first route deserves its own post and I’ll do it justice by doing exactly that. There are very effective ways that one can actually improve the outgoing fixed expenses. I’ll list out a few of them, below – feel free to comment on what you feel can also be added to the list – your mileage may vary:
- Rent for Accomodation – Stay in a place where the rent is around 25% of Income. In case this isn’t possible, shared accommodation (having room mates/flatmates) should be preferred.
- Daily Commute/Transportation – If you have moved to a new place, try out public transport and see if monthly passes to use said service is available. Usually, renting cars and hiring cabs will be really expensive and since you’ll be commuting to work every day, this will put a dent in the fixed expense bracket. If nothing else is working out, try to car pool with a colleague and try to split expenses.
- Monthly cost of Communication – Internet and mobile phone bills are also important to take care of for the modern salaried individual, try to get a budget plan (postpaid) which covers both aspects for your phone. In certain places, however, a pay-as-you-go mode (prepaid) turns out to be more cost efficient. So, choose this wisely as having a bad service provider will also hamper productivity while having too many services will swell your bill and also hamper your monthly budget.
- Family/Social Pressure – DO NOT start investing in Real Estate as soon as you start earning. A lot of people start feeling a lot of pressure to settle down from family and friends as soon as they start earning. Do not succumb to that pressure and start paying money into buying a home. There is a lot of thought that should go into that and unless you are getting property where the potential rent is in a 10% difference with the EMI that you’ll pay, I’d not suggest going for that mode of investment.
- Distance to workplace – Staying closer to work is also an oft-neglected aspect. This has a 2-pronged effect of not only saving money for transport but also another extremely valuable asset, time. Saving time allows one to invest in themselves and thus creating a pathway to improving income. So, if it is possible, try to stay close to your workplace.
- Cost of Good Nutrition – Another regular expense is on daily nutrition, please have a nutritious meal on a daily basis which is cooked or available fresh. When staying with roommates, this cost too can be split. Also, a lot of workplaces offer subsidized food, use that service or subscribe to a meal service which offers nutritious food. I stress on the the nutritious part, as, not falling sick saves money too.
- Filter your Subscriptions – DO NOT subscribe to services that you don’t need. Unless you are really going to use that gym on a regular basis do not subscribe. Same goes for the Netflixes of the world, restaurant subscriptions, newspaper subscriptions, cable TV subscriptions that cannot be split etc.
- Avoid Credit card and Personal loan Debt Traps – Credit card and other EMI scheme drill a hole into any budget on a very regular basis. It is wise to avoid the pitfalls of such unplanned expenses where the interest rates are some of the highest in the market. However, these are not entirely evil when used wisely and with a bit of planning. A future post is definitely on the cards on this topic.