The two questions that help manage your money well

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People often fail to realize that money management is all about some very basic fundamentals. And where it concerns investments, we first need to ask two fundamental questions: the first is how much ‘can’ we invest? and the second, how much ‘should’ we invest? Both questions may sound similar, but the answers can go in completely different directions. Let’s first explore the answers.

How much ‘can’ we invest is a function of two parameters: Income and expenses. Now we all know how difficult it is to control Income. We all want it to be as high as possible. Eventually, it's something where we have very limited control. Expense is where we can exercise control and unfortunately we either struggle doing it or fail completely.

I will segregate my expenses into two broad categories—discretionary and non-discretionary. Typical examples of discretionary expenditure are clothing, eating out, movies, etc. These expenses are not necessary for survival but reflect your lifestyle. Non discretionary expenses are rent, electricity, salaries for maids, grocery, toiletries, etc. The struggle that people face is to control their discretionary expenses. The first step is to budget for them once you have compiled your non-discretionary ones. So, let’s say you have a salary of ₹1.5 lakh per month and your non-discretionary expenses come out to be ₹70,000 per month. So you have a scope of ₹80,000 per month for discretionary expenses. So, is that the amount that you can spend on movies, dining out, etc. The answer is No.

Your disposable income is ₹80,000, income that you can spend without having to worry about your survival. Many among us just do that, spending it on discretionary items. Smarter people recognise that it is the sum of their