My Learnings from the Rationalization Exercise of Personal Finance

One area in which I made significant improvements during my ongoing career break is in the field of personal finance i.e., managing my own money.

Having taken finance electives in college( GAAP Financial Statements analysis and economics) and worked in startups, I decided to try and apply the knowledge to improve my current financial understanding.

That made to build my personal financial statements which are Balance sheet, P&L Statement, and Cash Flow statements, and evaluate myself how I evaluate a company as a fun project. While doing this exercise I uncovered many micro-learnings that are so insignificant when looked at an individual level but have a substantial impact when looked at collectively.

Major leanings:

1. I kept a large chunk of my money in the savings accounts which generated interest of about 3%. and I maintained multiple savings accounts with multiple banks which added a lot of friction and complexity. Did a rationalization exercise and closed 4 bank accounts as my money is getting blocked in them for maintaining a minimum balance and there were charges and penalties attached to Account maintenance ( MAB for metros >>> tier 2 cities) and Debit cards etc and I derived no substantial benefit in maintaining them.

2. Created Fixed Deposits for emergency funds - experimented with multiple strategies before settling on a tiered approach. Something that is inspired by Boss fights in Video games.

3. Closed 4 demat accounts that I hold which are of no use to me as of today. Consolidated my investments into 1 account. Closing the Paytm Money demat was the most painful one among them.

4. Understood my MF portfolio performance and made changes - withdrew from underperforming Regular Mutual Funds and Made investments in the Direct ones. Did a one-time rationalization exercise. Built a tracker by noting down the details like exit load, expense ratio, etc. to help me make a rational judgment in the future.

5. Took insurances - life and health and created mandates for them via Primary bank Account. By doing a comparative study on multiple options available, I realized how the companies do the corner-cutting to make the plans look more affordable than being really useful. Thanks, Ditto.

6. Opened a payments bank account and took Credit Cards for payments. Created a tiered approach for payments: Credit card or Payments Bank >> Secondary Bank >> Primary Bank for making a payment; This made the primary account clean by abstracting it from all the micropayments on UPI and others. and created Standing Instructions to automate the cash flow between the accounts. ( Again inspired by Boss Fights :P, I played too many video games as a kid)

6. Studied my spending patterns and created the cashflow out statement and found a few low-hanging but impactful insights and how being mindful while making a decision has rippling effects.

7. By using the balance sheet and cash flow statements, I built a dashboard for a few metrics

Assets - Current, Cash, Quick, sundry

Liabilities - current, non - current

Liquidity FMOS - Forward Months of Survival Ratios - Current, Quick

Working Capital 6 M - Capital available for discretionary spending without any regret to enhance my lifestyle.

Cash flow IN and credit sources.

8. Realised by first-hand experience why a quick ratio of 1.33 is quite desirable for not just companies but also at an individual level.

Just by connecting a few dots, I uncovered a lot of inefficiencies in my previous financial strategy which was very basic to a one with solid foundations. A lot of these are possible due to startups and the digitalization of banks and financial institutions, but still, there is a lot of room for improvement, maybe the companies are waiting for a little incentive to work on those problems.