How much you make is not as important as what you do with
it.
New habits are difficult to form but what is even more
difficult is to get rid of the old ones.
Unlearning is as important as to learn, the old needs to make
space for the new.
Financial stability cannot be achieved by not paying attention to your financial habits.
Have an Emergency Fund
Ideally you should set aside an emergency fund equivalent to
six months expenses.
This could be in a combination of liquid mutual funds and fixed
deposits.
The emergency fund could be more than six months of expenses
depending on other prevailing conditions but never less.
Always review your emergency fund annually, if your expenses have
gone up then so should the amount in your emergency fund.
Have a Retirement Fund
When you retire, you stop working but don’t stop living.
Your monthly expenses will continue as they were, in fact
taking into account inflation, it will only grow further.
Further when you consider rising medical inflation &
expenses & growing life expectancy, a retirement fund should be your
primary goal when investing if not a goal you prioritize.
You are going to grow old, it is not a voluntary choice and
your children are not your retirement fund.
Needs versus Wants
Understand the difference between needs and wants, they are
not the same.
Needs you cannot put off like eating, wants you can like
purchasing the recently launched and in vogue phone.
There are certain purchases where drawing a line between the
two can be a complicated task.
For eg. Buying a car for traveling to and from work along
with driving to and picking up your kids from school is a need but specifically
wanting a SUV for that is a want.
Understanding the difference between your needs and wants is
a good start but implementing your understanding is what eventually makes the
difference.
Budget everything
Budget everything and try staying within your means.
Making a budget would involve keeping a maximum limit on
each expense and trying to stay within that limit.
This will inculcate a sense of discipline and make sure you
never go astray.
Keeping a budget will help in avoiding unnecessary expenses.
Additional reading: Click Here to read about how to build a mutual fund portfolio.
Good debt versus Bad debt
Good debt refers to any debt that enhances the quality of
your life, instantly or over a period of time.
This could include an education loan or a home loan.
A home loan gives you security whereas an education loan has
the potential to elevate your earnings.
Bad debt is any debt that can have a negative impact on your
earnings with little to no upside.
This could mean any product, on the purchase of which its
value automatically declines, like say a phone, car,etc.
Debt is relative so what is bad debt for one may be good
debt for another and vice versa.
Track your Spending
Tracking your spending does not mean only having a mental
calculation of your expenses.
Once in a while you need to write down your expenses since writing
it down helps in the sense that it makes your expense feel real.
Note unnecessary expenses and avoidable expenses, no matter
how trivial they may seem cause the accumulation of such ‘trivial’ expenses
in the long run can cause a hole in your pocket.
Pay your bills on time, wherever possible try availing
discount rates on paying before due date and avoid impulsive shopping and
minimize dining out.
Prioritize your needs before wants and see how your expenses
take a dive.
Income & Disposable income
Income is what you have in hand before your expenses and
Disposable income is what is left after your expenses.
Ideally a higher disposable income should be the goal and
this would be dependent on various factors like how much you can save and your
expenses.
Most people only focus on income when in fact a higher
disposable income is what eventually counts.
Savings is not your Investment
Any savings you may have is not your investment.
Understand the difference between what constitutes savings
and what constitutes investments.
Fixed & Recurring deposits, PPF, NPS, etc. are savings
and not investments.
The current generation cannot afford to not invest with a
high rate of inflation and a higher life expectancy rate, retiring is not cheap
and there is no loan for retirement.
You cannot invest if you cannot save and saving is a habit
that needs to be inculcated as soon as you start earning.
Having both savings and investments is a necessity, the
allocation of which would depend on your risk profile.
If your earnings are not beating inflation by a decent
margin then you will end up working for the rest of your life.
Plan your goals
We all have life goals, some are general and some specific.
If you do not plan for your goals well in advance, you end
taking a loan which eats into your monthly budget and not all goals can be
delayed or for that matter even cut down on.
Plan for your goals and be disciplined in the pursuit of it.
You will have to fulfill your unavoidable goals in any
manner so you might as well go about it smoothly.
Avoid racking up credit card bills
Avoid racking up credit card bills to a point where not only
does it affect you financially but also emotionally and mentally.
Whatever you purchase, be aware of both value and not just
price for it is not necessary that a heavily discounted product adds value to
your life.
Whenever confused on whether you really ‘want’ something, a
simple thumb rule is to ask yourself if you can afford it twice without any
emi’s.
Impulsive shopping gives you temporary pleasures but the
after effects of it are more than temporary.
Small durable consumer credit card bills are acceptable
since they help build up your credit score.
Annual Review
Review the progress you have made towards your goals on an
annual basis, along with what you achieved and where you fell short.
If your expenses have gone up then your emergency fund should
also in accordance.
Keep a track of the taxes that you may have to pay and
whether you have saved enough for the same after making use of all the tax
saving instruments.
Ideally your contribution towards your investments should
also go up by a minimum of 10% on an annual basis.
If you do not learn to manage your hard earned money in an
efficient manner as early as possible, you will never be able to live a stress
free life.
Building new habits will take time, you will falter along
the way in the initial phases but it is important you never stop being
accountable to yourself.
Get back on track, start over and be disciplined in your
approach.
Some habits you will pick up instantly while some make take
months, don’t lose hope and keep in mind the bigger picture.
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