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The 4 Kinds Of Money In Your Life

It helps to look at our money as four kinds of money. Each kind of money has its own purpose and therefore needs to be saved and invested in its own specific way.

What do you do with the money that comes into your bank on salary day?

Most of us know that it's not always all ours to do as we please. We have prior commitments like rent, EMI, school fees, etc.; in addition, we need to save up for some big spends we are planning. We must, also, never lose sight of setting money aside for the day when we will stop receiving our salary cheque.

It, therefore, helps to look at our money as four kinds of money. Each kind of money has its own purpose and therefore needs to be saved and invested in its own specific way.

Money #1. Spending Money

This is the money we need to pay for our immediate commitments. Rent, household expenses, and loan EMIs come here. So do payments for life & health insurance. Some of these expenses are not monthly. School fees may be quarterly and insurance payments annually. But this is broadly money that we need to have in hand to pay for our day to day living.

Tip: Many people have clearly defined budgets to plan this expenditure. But don't worry if you struggle to organise yourself. A simple solution is to set aside 20% of your salary (30% if you are above 30) and make sure you manage your expenses within the balance.

The amount you save for the future would have different objectives too and the remaining three kinds of money refer to that.

Money #2. Short Term Money

This is money you are setting aside for expenses within the next 1-5 years. This could be to buy a bike or a car; pay for higher education or down payment for a home. This money needs to be set aside regularly and certainty of having the money at the right time is more important than beating inflation.

This money should not, therefore, be exposed to the fluctuations of the stock market. A bank RD or FD is what most people opt for but at Scripbox, we recommend carefully chosen debt funds because they have much lower tax on your earnings.

Money #3. Long Term Wealth

This would typically be money for your retirement or children's education and marriage - goals which are usually 15-35 years into the future. When your goal is a long time into the future, you need to worry about inflation which works to reduce the value of your money.

Equity funds are a historically proven option to beat inflation over the long term and you should consider them for your long term wealth. Please note that equity funds should be seen as a way to generate wealth over the long term rather than getting super short term returns.

Money #4. Tax Saving Money

To encourage long term savings, the government gives us tax breaks. Up to Rs. 150,000 invested in specified options is reduced from your income every year and saves income tax. It makes sense for everyone to put some of their long term investments into these options.

In a way this is a special kind of long term wealth but we treat it as a fourth kind because these investments always come with a lock-in which varies from 3-15 years. We recommend tax saving (ELSS) funds over the other permitted options.

Mutual funds work for all 4 kinds of money

Most people don't realise that mutual funds can help you make the most of all four kinds of money. Yes, even the kind that you need ready access to because your mutual fund now comes with a debit card and you can go shopping or even withdraw money from your mutual fund using an ATM.

Scripbox offers a safe place for all 4 kinds of your money – invested in the best mutual funds chosen scientifically for you. Get started here.

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