Rome was not built in a day nor was this once magnificent city laid down with bricks alone. It took hours of brick layering coupled with other building materials to lend it a shape that the world looks at in awe and admiration. The grandeur of this city that took years to complete gives us a lesson on the importance of time and how constant deliberation is needed to succeed. This is true for your financial health too.
Much to the dismay of many people who focus on mental and physical health alone, financial health is essential to attaining and sustaining both in the long run. This is because you need money to pay for your daily bills that go a long way in maintaining your health and sanity. This explains why you must not be reckless with your finances.
A good financial condition does not imply a luxurious living; rather it underscores the importance of comfortable living ushered in through sensible financial decisions through regular savings and disciplined investments. Apart, keeping debt at bay is important to tackle financial uncertainties.
Living a healthy financial life involves adhering to the following principles.
Eliminate debt
There is no bigger worry or enemy in life than the debt itself. Eliminate any and every decision that requires you to take a loan or incur debt. If you cannot get rid of debt or the possibility of taking one, then try to mitigate the burden of debt by repaying it on time. You may also consider prepaying your loan through an increased amount of equated monthly instalments (EMIs).
If you have sought multiple debts, then consolidate your debt by shifting to a low-interest option and then pay it off accordingly. Lower debts must not prompt you to take on more debts. The burdening effect of debt grows with time, which is why you must never opt for an extended loan tenure, if possible. Apart, a life free of debt allows you the much-needed freedom to decide how you would like to invest your savings or spend a part of your disposable income for comfortable living.
D Muthukrishnan, Chennai-based Certified Financial Planner says, “Debt removes optionality in many aspects of life. Changing a job or career is a difficult decision if there are EMIs to pay every month. Debt is slavery. Savings is freedom. Having a year’s worth of expenses in savings bank accounts and fixed deposits would provide an adequate cushion for decision-making regarding changes in life path. Don't tie yourself with debt. Fly free with savings.”
Disciplined investing
Discipline in any field will ensure success. The same is true when it comes to investing your money also. Instead of haphazardly putting in your money in myriad instruments, you must focus on wealth creation by parking money in investment options that earn returns beyond inflation. It is also important to plan your investments well, which includes deciding your investments and automating them so that they continue regularly irrespective of market movements.
Viral Bhatt, Founder, Money Mantra says, “The classic board game Othello carries the tagline “A minute to learn... a lifetime to master.” That single sentence could apply to the task of choosing your investment opportunities. Understanding the basics doesn’t take long, but mastering the nuances can take a lifetime. One must account for two important factors before deciding on the right investment option.
- Commit to a timeline. Give your money time to grow and compound.
- Determine your risk tolerance, then pick the types of investment opportunities that match it.”
To start with, you can put money in large-cap equity mutual funds that are relatively stable and earn high returns. If you are willing to take risks, you may put some of your money in small-cap funds or thematic investment options that will yield you more though you may have to wait for a considerable period to witness the results. Those with less risk appetite can opt for a Public Provident Fund (PPF) or resort to putting money in National Savings Certificates (NSCs).
If you are already planning a retirement corpus, start with putting some money in National Pension Scheme (NPS) which allows you to choose from multiple pension fund managers and allocate money into equities, government securities, bonds and more. NPS is gradually getting precedence over other pension plans with its guaranteed scheme expected to roll out by September this year. You may also start with a retirement mutual fund that you may invest in for the next 25-30 years of your life.
Know your risk appetite. Stay focused on your financial goals. Invest well. Invest regularly.
Get rid of your loans on time
Bank loan interest rates are on the rise, but that must not deter you from repaying your loans on time. If you have existing loans, stick to repaying them as before even though you may have higher EMIs to pay. Those planning to take a loan must stop for the interest rates to cool down. Seeking an extension of your loan tenure will result in more interest outgo, while the inability to repay your loan on time can affect your credit score adversely.
Adhil Shetty, CEO, BankBazaar.com says, “Every loan, regardless of the ticket size, is reported to the credit bureau. All the associated repayment details, such as the number of EMIs, the dates on which payments are made, the due date, the outstanding amount, etc., are reported every month, and your credit score gets updated based on this data. Timely repayments reflect your good financial management and discipline. If you make your repayments on time, it reflects in your credit history and has a positive impact on your score. This means your score is on the higher side, making you eligible for future credit.”
Know your financial goals
Merely earning for the heck of it is not enough. You must keep a tab on how much you earn and the amount you would like to see in the future. For this, you must first have certain financial goals in mind. Time and again, review your goals and check if you must rearrange your investments to `be able to attain them on time. This will help you make the necessary financial adjustments that you can then choose from to invest your money accordingly.
Have an emergency fund in place
Unforeseen circumstances may not come knocking at your doors, which means that you must be prepared financially well to tackle them as and when they come. This necessitates you to have enough money in your savings bank accounts. Ensure that you have enough money in the fund to address your financial requirements in case of sudden job loss or medical emergencies.
Suresh Sadagopan, founder, Ladder7 Financial Advisories says, “The amount should be based on the estimation of any known contingencies. For those who are not aware of known contingencies, it should be a lumpsum amount that is meaningful like say Rs.4-5 lakhs.”
However, many people inquire about how to decide on the right emergency fund amount. Some put it as six months’ worth of expenses while others advise a higher emergency corpus to tackle unexpected situations.
Dev Ashish, Founder, Stable Investor says, “The size of the emergency fund depends on myriad factors including job security, risk of income loss, number of earning members in the family, earning ability of dependents and tendency of dependent family members to fall ill or meet with accidents.”
Prefer tying up your emergency funds in savings bank accounts and fixed deposits. If you want a larger corpus set aside for emergencies, then even liquid funds can also be added to the mix. Do not park the emergency fund corpus in high-risk instruments to gain high returns. Remember that you have created the emergency fund so that you can take out the money as and when needed and not lose it to sudden market downturns.
Buy health insurance
Imagine yourself in a situation when you or one of your loved ones is hospitalized and the bill runs into lakhs of rupees. Sad, but true. The expenses for medical treatment have skyrocketed in the past few years. Hospitalization and subsequent treatment have caused many families to suffer from unwanted financial distress. Now imagine if you have health insurance in place that pays the majority of the bills leaving you to foot only the basic and additional expenses. A lot of money that is otherwise spent on medical treatment is saved with a health policy in place.
Some people treat the health insurance premiums as expenses not realizing how they would be far shifted from their financial goals with no proper plan in place. Paying for treatment using an emergency fund may not help as the expenses may be much higher than what you had set aside in the corpus.
Pratibha Girish, Founder, Finwise Personal Finance Solutions says, “Hospitalization costs are going up at an alarming rate. Even a minor unforeseen health issue can make a severe dent in your wallet. Well-made plans can go for a toss if you need to dip into your corpus for medical emergencies. It’s therefore important not only to have health insurance but to have an adequate amount of coverage. Most people we see have very poor cover, treating health insurance like a tick mark activity which will not solve your purpose.”
Do not let medical inflation take away your hard-earned money. Buy health insurance with an adequate cover that will keep you protected at all times.
Celebrate life
It does not help to stay morose always. Earn, save, invest and then spend. Keeping these in mind will ensure that you never run short of money, especially, after retirement when you have low or no access to income at your disposal. If you think that you have failed to save enough for your dependents, you may consider buying a life insurance policy that will take care of their financial needs in your absence. Treat insurance as a necessary expense, and only then you will realize its importance and place in your financial goals.
