We are approaching the end of the financial year. This is the time when we realise the mistakes we made with our finances during the year and warn ourselves to not repeat the same in the year to come. Though the same technique may not work best for two different individuals with different financial backgrounds and spending habits, there are certain basics that each of us should know.
Here’s a checklist of 7 essential personal finance lessons so that you don’t regret your financial behaviour next year this time.
- Keep Expenses Within Your Income
Plan your expenses such that it does not go over and above your income. During the initial stage of your profession, it is recommended that you cut down expenditure on unwanted things and save money. This goes, especially, to shopaholics out there (you know who you are). As a matter of fact, it is not your income that makes you rich, it is the spending habits that make you rich.
You must remember the formula for a good financial plan: Earning – Savings = Spending + Investment. You must spend and invest the portion of the money that remains after saving for your future from the money you have earned. Instead of saving the money left out after spending on all that you want, the formula makes more sense. - Set Financial Goals
It is necessary for every individual to set their financial goals and keep it realistic. You need to work out a plan with minute details such as by what age you want to achieve them. Now, it is time to understand how you can achieve it. For example, you may want to clear off your education loan by the age of 25 years, visit Rome by the age of 26 years, and buy a car and a maybe, own a house by the age of 27 and 28 years, respectively.
The trick is to analyse different savings and investment options so you can make them come true. You will, then, choose the risk you are ready to take, the income you need, and other related pointers. - Pay Off the Loan with a Higher Interest Rate
This advice is for those who have more than one loan, such as an education loan, gold mortgage, personal loan, and home loan, in front of them. Prioritise the loan with a higher interest rate and try to get rid of it first. Among all others, choose to pay off credit card balances first as they come with high-interest rates. - Build an Emergency Fund
When it comes to financial planning, setting aside an amount towards emergency funds is one of the top-most lessons. This has to be taken care of irrespective of the size of your monthly earnings. Setting an emergency fund is necessary because you don’t know what your future has in place for you.
Though it is not desirable, there can be an unexpected medical emergency, a job cut, loss in business, or anything else. Make sure to keep the emergency fund as liquid as possible so you can seek it at the time of need. - Auto-Transfer Money to Savings Account
As stated by the formula above, savings must directly be taken from your earnings before you spend the money on necessary/unnecessary expenditure. Therefore, it is a good idea to make necessary arrangements such that the day following your salary credit, the set amount should be debited from your salary account and credited to your ‘piggy bank’.
This ‘piggy bank’ can be a recurring deposit account, fixed deposit account, or regular savings account meant only for emergency funds. Further, you could also use a more standard way of saving it, such as the Voluntary Provident Fund, National Savings Scheme, and other government-backed small saving schemes. - Purchase a Medical/Term Insurance
Most of the millennials, these days, opt for desk jobs that prefer you to sit in front of computers the whole day without proper exercise to the body. Such a lifestyle may lead to a variety of lifestyle disorders such as obesity, heart disease, diabetes, stroke, and hypertension.
It’s not just you, you must also consider the wellness of your family. Instead of not being able to afford to get medical treatment at the hour of the need, it is wise to invest your money into purchasing medical insurance. The medical insurance will cover your medical ailments and ensures that there is no financial burden on you. - Diversify Your Portfolio
When you think you are ready to play in the investments market, the foremost thing you must remember is to diversify your investment. If you heavily invest in real estate, liquidity may get difficult at the time of emergency. In contrast, keeping huge amounts of cash with you can be difficult at times of demonetisation. You must take up a smart mix of assets from different instruments so that one market crash can be balanced by another market’s hike.
Also Read: Medical insurance: Take precaution against a medical emergency
Bonus: Don’t Forget to Plan for Retirement
You need not be a 50-year old to start thinking about retirement. There are many retirement schemes and mutual funds that give you the benefits of compounding interest. You can make the most of these schemes when you start investing in them early in your career.
For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in