Heard of ‘do not bite more than you can chew’?
This stands true for most things but especially when it comes to money.
Many earning individuals struggle to maintain a healthy balance between income, spending, and saving. Amidst rising living costs and fluctuating economic conditions, it is too easy to fall into the trap of dissaving.
But what is the meaning of dissaving, and what effect does it have on your life? How can you avoid dissaving? Read this blog to find out.
What is Dissaving?
Dissaving happens when someone’s spending surpasses their income. This leads to spending tomorrow’s money today—by dipping into saving or borrowing.
Dissaving occurs when:
- Spending grows with lifestyle inflation but the income doesn’t increase.
- Sudden expenses like medical emergencies or car repairs can disrupt your financial plans, making you rely on savings or credit.
- Economic strains such as job loss, and family additions without prior planning.
How Dissavings Ruin Your Finances?
Dissaving decreases your savings and emergency funds, increasing your risk of unplanned expenses and financial emergencies.
At first, dissavings might provide a quick solution to immediate financial needs or desires, but they can create long-term problems. If dissaving continues, it can snowball into a serious debt problem as you borrow more to cover your expenses.
Lending to cover your expenses often leads to a cycle of debt repayment, with interest rates worsening the financial situation. This not only does it affect your wallet, but it has a significant impact on your mental health.
How Can You Avoid Dissavings?
Here are some effective ways to prevent spending more than you earn.
1. Create and Regularly Review Your Budget
The first step to avoiding a financial spiral is to know income and expenses. Income can be from your job investments or side hustles. Next, list your fixed expenses, such as groceries, utilities, medications, and insurance payments. These bills are likely pretty much the same every month.
Set a budget for these items and stick to it to avoid overspending. Also, it is essential to review and adjust your budget by reassessing financial situations once in a while and making changes if needed.
2. Debt Management
A sound financial practice is to maintain a manageable debt-to-income ratio. While some benchmarks may vary, aiming for a lower percentage is generally advisable.
If you have multiple high-interest loans that you borrowed a few years ago when you did not have a strong credit profile, but since then your credit score has improved due to timely repayments, apply for a new loan at lower rates. Use it to pay off all high-rate debts at once.
3. Income Diversification
Having a secondary income source enables you to rely on your primary income for essential expenses and savings while using the additional earnings for discretionary spending. This approach not only protects your savings but also allows you to invest more strategically in your future.
If you own a vacant property, consider renting it out to create a steady stream of passive income. This can enhance your overall portfolio and provide cash flow that you can reinvest.
4. Savings Goals
Setting specific financial goals, whether it’s for a new car, a house, or retirement, is crucial for staying motivated and consistent with savings. When goals are clear and achievable within a set timeframe, it becomes easier to maintain focus and measure progress.
For example, breaking down large goals into smaller, manageable milestones can make the journey less daunting and more achievable. Moreover, realistic goals ensure that expectations align with financial capabilities, reducing stress and enhancing commitment to the saving process.
5. Investing Your Money
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While saving is a crucial part of financial planning, investing can often be a more effective way to grow wealth over time. You can invest in real estate, bonds, or stocks to earn a return higher than that from traditional savings accounts.
However, before putting your capital into investments, remember that all investment options carry a certain level of risk, and not all options are ideal for everyone. It is important to review your risk profile and the purpose for which you are investing. For example, if you are investing for a secure retirement, schemes like NPS and PPF can be suitable choices.
6. Make Lifestyle Changes
Simple lifestyle changes can lead to significant savings over time. You can reduce extravagant spending, such as partying every weekend, buying new clothes every time you visit malls, or dining out frequently, by sticking to homemade meals.
Additionally, consider using public transportation for commuting to the office and using your four-wheeler occasionally.
7. Build an Emergency Fund
You never know when an emergency will hit, leaving you with insufficient funds to deal with the situation.
You should save aside a portion of your income and put it into emergency funds until it equals six months of your monthly income. It will help cope with medical crises, job loss, or other uncertainties.
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While traditional savings accounts often offer low interest rates, mutual funds provide higher potential returns, especially over the medium to long term. This helps your emergency fund grow rather than just sitting idle.
Conclusion
Spending more than you earn is never a good idea, as it can trap you in debt, where higher interest payments may lead to default and a worsening of your credit score.
To manage this, it is important to focus on budgeting, cutting down on lavish expenditures, and prioritizing investment. Remember, small steps can lead to big results.
While it is necessary to avoid dissaving to stay financially stable, inflation requires one to take that extra step in wealth creation.
You don’t need to go big right from the start, even small investments can grow significantly over time thanks to compound interest.
See how the magic of compounding works in wealth creation through a disciplined approach:
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