Just like your physical well-being, your financial well-being depends on the day-to-day choices you constantly make. While healthy habits like eating better and exercising keep you fit, certain financial habits can keep you financially comfortable and help you build wealth. Life becomes easier when you gain substantial financial knowledge and capabilities. Often they are struggling with financial emergencies, unnecessary expenses and mounting debt.
The good news is that establishing good financial habits rarely goes beyond the point of no return. The sooner you choose to control your finances, the sooner you can pursue your goals without losing sleep over money. Whether you are financially savvy or not, acquiring these habits will put you firmly on the path to financial peace of mind.
Set clear goals
What do you think financial independence is? Everyone wants it; however, this is too dubious a goal. The more specific your goals are, the higher the likelihood of achieving them. Carefully record all amounts and deadlines and write them on a goal sheet. Look for major money leaks, such as high-interest debt. Imagine how you would like your finances to look like in the future. Identify the appropriate steps to achieve your financial goals. This would help you prioritize and set reasonable financial goals.
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Create an emergency fund
An emergency fund is useful in various situations, such as a sudden hospitalization, or on the contrary, if you have to take an unexpected last minute trip somewhere. Knowing that there is money available in a crisis can help when life gets unpleasant. So give yourself peace of mind by building an emergency fund that can support at least three to six months of regular expenses.
Assuming you have dependents financially, you should have term insurance. Make sure your insured amount is sufficient to meet the expenses of your family members to support immediate incidental expenses, expenses to support children’s education and your spouse’s life expectancy. It is always better to separate life cover and pure investments to justify family security and wealth creation.
The proverb “prevention is better than cure” is essential to financial prosperity. You cannot stay away from increasing occurrences of disease. Moreover, the rising cost of medical services has made health insurance an unquestionable necessity. Given the current trend, it would be good to maintain a basic policy and a supplemental policy to keep the cover considerably higher up to Rs 1 crore.
Investing in Mutual Fund SIPs
A Systematic Investment Plan (SIP) prepares you to invest modest sums to build a corpus for a set period of time for a goal. Since this method spreads investments over a long period of time, it will average your purchase costs. It will help you stay invested in any event during market ups and downs. This will act as the best savings tool for wealth building and offers high inflation beating returns compared to fixed deposits and recurring deposits.
Budget creation and planning
Budgeting is a great financial habit. There are several ways to do this. Group each expense according to its necessity and start with the top three priorities. Create a plan that clarifies your income, expenses, various assets, insurance, investments, liabilities, and specified goals. You are positioned for financial success if you can save up to 30% of your monthly salary for investments and savings.
Proper retirement planning
Suppose you are a 25-year-old person spending Rs. 20,000 per month on household living expenses. By the time you retire at the age of 50, considering the inflation rate of 6% per year, you will need Rs 85,000 per month until your life expectancy. To achieve this, you need to have a corpus of around Rs 2.5 crores. This simple example shows why planning for retirement is an absolute necessity.
Make credit card payments in full
The lower your utilization rate, the better your credit score. If you can’t service your credit card in full every month, plan to keep it under 30% utilization. Setting your credit limit can be more complicated than just taking care of your monthly balance. For example, if you have a credit limit of Rs 5 lakhs, you should maintain a balance of Rs 1.5 lakhs or less every month.
Take note of your credit score
Your credit score determines the interest rates you are offered when buying a new vehicle or refinancing a home. It also influences how much you pay for many other essentials, like life insurance coverage and car insurance. Obtain a credit report at regular intervals to ensure a good CIBIL score.
Take good care of your health
Taking care of your physical well-being significantly affects your financial well-being. Many health issues can be resolved through intervention with essential lifestyle changes. Poor health may force early retirement with lower monthly payments for the rest of your life.
To sum up, how much you earn doesn’t matter. How smartly you manage what you earn matters a lot. Always adopt smart financial planning with fewer financial products, which is more effective than accumulating many practically ineffective or necessary financial products.
(The author is Leader, Financial Wellness, AscentHR)