Like your physical well-being, your financial well-being relies upon the daily choices you make consistently. While healthy habits, such as eating better and exercising keep you fit, certain financial habits can keep you monetarily comfortable and help you establish wealth. Life gets easier when you gain substantial financial knowledge and abilities. Frequently, they battle with financial emergencies, pointless spending, and growing debt.
The good news is that laying out good financial habits is rarely past 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 matters. Whether you are financially savvy or not, acquiring these habits will put you firmly on the way to financial peace of mind.
Set clear goals
What is financial independence according to you? Everybody wants it; however, that is too dubious a goal. The more specific your goals, the higher the probability of accomplishing them. Record all amounts and deadlines cautiously and put them on a goal sheet. Search for the topmost money drains like high-interest debt. Imagine what you’d like your finances to look like in future. Identify the proper steps to accomplish your financial goals. This would help you prioritise and set reasonable financial goals.
Create an emergency fund
An emergency fund is helpful in various situations, like sudden hospitalisation, or on the other hand, if you need to make unexpected last-minute trip somewhere. Knowing there’s cash accessible in case of a crisis can help when life gets unpleasant. So provide yourself with peace of mind by setting up an emergency fund which can take care of at least three to six months of regular expenses.
Term insurance
Assuming that you have financial dependents, you should have term insurance. Ensure that your insured amount is adequate to deal with your family members’ expenses to take care of immediate incidental expenses, the expenses to sustain children’s education and your spouse’s life expectancy. It is always better to keep life coverage, and pure investments separate to justify family safety and wealth creation.
Health care coverage
The proverb ‘prevention is better than cure’ is vital to financial prosperity. You can’t keep away from the growing occurrences of illnesses. Adding to it, increasing medical services costs have made health insurance an unquestionable necessity. Considering the current trend, it would be good to maintain a base policy and top-up policy to maintain the considerably higher cover up to Rs 1 crore.
Invest in mutual fund SIPs
A Systematic Investment Plan (SIP) prepares you to invest modest amounts to create a corpus throughout a specified period for a goal. Since this method spreads investments over a long period, it will average your buying costs. It will assist you with remaining invested in any event during both the high and low points of the market. This will act as the best saving tool for wealth creation and offers high returns beating inflation compared to fixed deposits and recurring deposits.
Budget creation & planning
Setting up a budget is a great financial habit. There are lots of ways to do this. Group each expense by how necessary it is to you and begin 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.
Adequate retirement planning
Suppose you are a 25-year-old person spending Rs 20,000 per month for regular family running expenses. By the time you retire at the age of 50, considering the inflation rate as 6% per annum, you’ll need Rs 85,000 per month till your life expectancy. To achieve this goal, you must have a corpus of about Rs 2.5 crores. This simple example shows why retirement planning is an absolute necessity.
Make credit card payments in full
The lower your use rate, the better your credit score. If you can’t take care of your credit card in full every month, plan to hold it under 30% use. Fixing your credit limit can be more complicated than simply taking care of your monthly balance. For instance, if you have Rs 5 lakhs credit limit, you should keep a balance of Rs 1.5 lakhs or less every month.
Take note of your credit score
Your credit score decides the interest rates you are offered while purchasing a new vehicle or refinancing a home. It likewise influences the amount you pay for many other essentials, like life insurance coverage and vehicle insurance. Get a credit report at regular intervals to ensure a healthy CIBIL score.
Take good care of health
Taking good care of your physical well-being emphatically affects your financial well-being. Numerous health issues can be helped from some intervention with essential lifestyle changes. Poor health might compel early retirement with lower monthly payments until the end of your life.
Conclusion
To sum up, how much you earn does not 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 piling up many financial products that are practically ineffective or required.
(The author is Leader, Financial Wellness, AscentHR)