Human mind requires some kind of incentive to start anything afresh. Somethings which are not mandatory or made compulsory are never handled well. Self-discipline is one of the key challenges in voluntary activities. This is all the more accentuated in cases of finance and investments.
April 1st is a new financial year beginning. The Lunar & Solar calendar new years are just around the corner in the first fortnight of April. What better way to usher in new year than to make some serious commitments for the well-being of the two most important people in life.. YOU & YOUR FAMILY…
Let me jot down some common gaps which I found in various discussions in different forums. These are not necessarily an exhaustive list, but is definitely a starting point in case the reader identifies themselves with any of them.
- Cash Flow: The first and the most fundamental part of any financial journey is to capture the cash flow. With the advent of cards especially credit cards, the flow can be uninterrupted and pretty regular. What starts off as a trickle soon snowballs into a waterfall. The investor who is embarking on the journey of financial well-being should first take into account the cash flow i.e. What are incoming (Salary, Rent Income, Interest Income etc) versus what are outgoing (Rent/EMI, lifestyle, school education etc..). This step is to just collect the data
- Budget: Once the raw data is available, analyze them and understand your cash flow. It’s very easy to focus on the majors and identify potential money-suckers. But the main culprit would be the credit cards. Analyze your spending pattern and identify which are mandatory and which are discretionary. Consider to reduce the discretionary expenditure over a period of time. (One piece of realistic advice: Friends/Relatives who stick like ants to Jaggery wouldn’t be around when the money dries up). Once the analysis is complete, draw up a budget for 3 months and track how well you are performing as compared to projected expenditure. Refine your process every 3 months till you become comfortable with the same and you should be able to project upto an year’s expenditure
- Loans: There are good loans, there are bad loans and then there are EGO loans.. Good loans include those spent on purchasing or refurbishing a home, buying a car, educational loan. Bad loans include personal loans taken to clear credit card debt, Credit card outstanding converted to EMIs, anything that is converted into EMI, Loan to finance the latest swanky phone, Gold Loans (Ask any 60+ year old person, you will get your answer as to why this is bad). Now that we have set the ground rules clear, what is this EGO loan? Well, I define this to be any loan which is servicing an asset which was bought as part of EGO trip as compared to financial prudence. For ex: Stretching beyond one’s means to take a high-end apartment, Buying the latest iPhone when other loans are outstanding, Buying a high end car when the real requirement could be a hatchback etc.. Again, these are personal decisions. However, when an individual is planning to buy them, a careful analysis of the need v/s reality needs to be performed. To sum it up, in my view, the total outgo for all loans combined shouldn’t exceed more than 35% of income. A parting shot: No company or no one in this world guarantees a salary till EMI tenure is completed. Ask those who have lost job what it means to have an outstanding EMI.
- Emergency Fund: Everyone requires an emergency fund in case of unforeseen circumstances like job discontinuity, job loss or other personal issues. How much is enough? Well, I feel that a bare minimum of 6 months of expenditure should be saved. This includes all household expenditure (lifestyle), EMIs/Rents, School Fees, Insurance payment for cars/bikes/health insurance etc.
- Health Insurance: Everyone would have a company provided health insurance. However, it is important to have a personal health insurance plan. Why? Suppose, you join a startup where there is no health insurance cover? Or, suppose you want to retire at 45 where company provided health insurance ceases? It’s best to have one’s own health insurance plan for safeguarding against future medical costs.
- Goal Planning: Identify and note down your goals. Get realistic about the numbers and do factor in Inflation. Draw up an investment plan for meeting your goals and be diligent about your investments. As a bare minimum, one should target to save 30% of income for their financial goals. Increase this number as your disposable income grows.
- Have Fun: Beyond all this financial prudence mumbo-jumbo, it’s very important to have fun and live life to the fullest. Catch the latest movie. Go out with family to that resort or take vacation. Develop a hobby. Whatever you want to do, take a judicious financial call and enjoy. After all, one earns for enjoying with family and treasuring those lovely moments.
This is just the tip of ice-berg and each one of the above can be elaborated into much detailed points. However, the idea is to plant a seed so that the reader can consider if something applies to them and if so, some affirmative action is taken in that direction.
One last point: Invest on studying about the financial products you plan to invest in. This knowledge investment will stand you in good stead over time.
Happy New Year in advance… Happy Investing.. Have Fun !!
Do drop in your views/thoughts/suggestions/feedback about the same..