« How to budget, save and invest without regular income from salary? Which debt to pay off when you have more than one loan? »

How to budget, save and invest in a stress-free manner?

Posted on 18 Jun 2021
Author: Sayan Sircar

Tags: Budgeting

4 mins read
Get new post notifications on WhatsApp!

Use the superpower of the pay-yourself-first method to spend, save and invest.

Budgeting via pay yourself first

Introduction

Pay-yourself-first is one of the golden rules of personal finance that builds up a habit of saving and investing. This concept is similar to a loan where the lender deducts the EMI automatically every month. There are penalties for missing a payment. We can use the same technique for savings and goal-based investing.

The main benefit of paying-yourself-first is that the money is moved out of reach before discretionary expenses start. It is like a salary that you are paying to your future self.

Expenses = Income - Investments, i.e. money is spent only after money is saved and invested.

Based on how your income is structured, either regular from salary or irregular from your profession, business or freelancing, you should

Fix a minimum percentage value like 30%. The more you can allocate, the better it is for the plan to work.
As soon as you get income, transfer that 30% money to a separate investment account (automate this for salary income via an NEFT instruction). The process will fail if you do not follow this step.
Whenever income goes up, bump up that percentage
Maintain the percentage contribution as much as practical. Do not lower it.

Recent articles:

1 / 3

<p>A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.</p>

2 / 3

<p>This article explains the PFRDA announcement about a new default scheme under NPS Tier II for government employee subscribers.</p>

3 / 3

<p>As per SEBI rules, mutual fund investors must have nominees in their folios by 1st October 2023 or explicitly opt out. Otherwise they will face restrictions in selling units.</p>

❮ ❯

Join the Arthgyaan WhatsApp community: You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

Using buckets

Budget waterfall

Use your income to fill expense buckets in this order:

Bucket 0: Monthly expense buffer to cover mandatory expenses for a few months to smoothen the budget. Bucket 0 is well suited for folks with irregular income (covered in more detail here). Salaried individuals can skip it since their salary will cover all monthly expenses
Bucket 1: investment fund: invest as soon as this bucket has money as per goals
Bucket 2: Emergency fund: hold 6-12 months of expenses and all EMIs in 50:50 proportion in a savings account and liquid mutual fund. See this detailed post for discussion of the emergency fund.
Bucket 3: Sinking fund: This is for insurance payments, trips, festival shopping, white-good replacement etc. Estimate the yearly value for all of these and target saving 1/12th every month in the bank. This is discussed here in more detail.
Bucket 4: Fun fund: save money here for things like entertainment, trips, gadgets and experiences. Allocate what you want for this bucket and try to stay within that limit.

Tracking expenses

For budgeting to be effective, you should track expenses via apps like Hello Expense, YNAB, or anything (even a spreadsheet or physical diary) that allows you to note down expenses as you make them. Use the Pareto principle (ensure that the biggest spends and recurring smaller spends are both captured). This way, it is not necessary to track every rupee spent. The target here is to be more or less accurate regarding your estimated and actual spending. For completeness’ sake, we will briefly touch upon debt payment. There are two methods for paying off multiple loans. Of the total amount of money being allocated for debt payments every month, call it D rupees per month:

debt avalanche method: here most of the payment (out of D) is made to the highest interest loan first and for the rest, only the minimum payment is to be made
debt snowball method: here most of the payment (out of D) is made to the loan with the lowest outstanding balance first and for the rest, only the minimum payment is to be made If there is only one loan, you need to pay at least the minimum amount monthly. We have already covered home loan payment here. We have discussed overall debt repayment in more detail here.

Note of caution: Pay-yourself-first works only if you decide to aggressively implement the practice with a percentage contribution as high as possible, preferably via automated transfers. If you follow thumb rules that say “save %x of your income”, there will be two problems:

it will give you a target that seems easy to achieve (for example, the 30% that is given above)
provide a false sense of security that not be sufficient for long term investment goals

So instead of fully dependent on thumb rules, adjust the percentage figure of pay-yourself-first suitably for your financial condition. If you need an exact calculation, here are some posts that can help you:

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Worked out case studies for goal-based investing

Case study: how can this middle aged investor with two children plan for retirement and children's goals?

This article shows how a single-income middle aged couple with two small children reach their retirement and children’s goals.
Case study: can this double income single kid family reach FIRE at 50?

This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?

This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
Case study: how this double income recently married family can perform DIY goal-based investment planning

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Case Study: How should couples in their 40s with a new baby plan their financial future?

Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
Case study: how this double income single kid family can perform DIY goal-based investment planning

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

Previous and next articles:

<p>If you have an irregular income then follow these steps to spend, save and invest in a worry-free fashion.</p>

Budgeting

How to budget, save and invest without regular income from salary?

If you have an irregular income then follow these steps to spend, save and invest in a worry-free fashion.

Published: 17 June 2021

4 MIN READ

Loans

Which debt to pay off when you have more than one loan?

We discuss the two common debt payment methods that exist which can be used to easily pay off multiple loans: the avalanche and snowball methods.

Published: 19 June 2021

5 MIN READ

Latest articles:

<p>This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.</p>

House Purchase

How much EMI do I have to pay for my home loan?

This article shows a handy ready reckoner for home loan EMI amounts for all tenures and interest rates along with the amount of principal and interest to be paid.

Published: 29 September 2023

1 MIN READ

Retirement Reader Questions

How much money does this 39 year old investor need to invest per month to retire at 58?

A quick retirement calculation for a reader query who has a good amount of corpus already saved for retirement.

Published: 27 September 2023

7 MIN READ

Topics you will like:

Asset Allocation (20) Basics (8) Behaviour (10) Budgeting (11) Calculator (17) Case Study (6) Children (12) Choosing Investments (38) FAQ (6) FIRE (13) Gold (11) Health Insurance (4) House Purchase (17) Insurance (15) International Investing (10) Life Stages (2) Loans (9) Market Movements (13) Mutual Funds (29) NPS (6) NRI (13) News (9) Pension (8) Portfolio Construction (46) Portfolio Review (27) Reader Questions (6) Real Estate (6) Retirement (36) Review (12) Risk (6) Safe Withdrawal Rate (5) Set Goals (27) Step by step (14) Tax (37)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.