These moves will ensure that you take firm steps towards financial independence.
Most of us resolve to stop bad habits such as lethargy, not waking up early in the morning, smoking etc. Very few of us, however, take a resolution to adopt good
financial habits that is necessary to lead a financially independent life. In this article, we will discuss five financial moves that will help us live a better life
financially and emotionally.
I will learn and master at least one financial product
Most of us are not very conversant with financial products. This results in bad investments and sometimes loss of money. Take the resolution to understand at least one financial product such as mutual funds. Focus on the most important features of any financial product, namely risk, average return, and the overall costs. Only after knowing risk and reward, we can take better decision about investing.
I will pay myself first
While this may sound selfish, it’s actually a very pragmatic approach. Paying yourself first means doing whatever is necessary for the well-being of you and your family. Other things can wait. Take out a part of your income and put it into savings that can be withdrawn for any emergency. Many people take life for granted and do not save enough to take care of any sudden emergency. When the emergency does arrive, they ask family and friends, or take personal loan. It is certainly more prudent to be self-sufficient by creating a corpus for emergency purpose.
I will invest every month, however small the investment
Investment doesn’t have to start after you get that big break or coveted promotion, go to the USA on official work, or change to a job that pays 50% more than your current job. These things can take time but your investing need not wait. Start investing with whatever you can save every month. For instance, start a mutual fund SIP. It can be started with as little as Rs 1000 per month. Or, start a PPF investment with as little as Rs 10,000 per year.
The difference an early investor can make over a late investor is huge. The power of compounding works like magic. Let’s take an example.
Suppose you and your friend work at the same level in a company and both of you earn the same salary. You start investing Rs. 5,000 per month now in a mutual fund SIP.
Let’s assume a moderate return of 12% over the long term. Being a smart investor, you are going to put the same amount every month for next 30 years. An investment of Rs 5,000 per month in mutual fund SIP for 30 years at a moderate rate of return of 12% will compound your money to 94 lakhs.
Suppose your friend doesn’t start now but starts after five years. Since he has only 25 years for investment, he may presume that he would “beat you” by
investing a little extra and cover the gap. That “little extra” amount every month for the next 25 years is a cool Rs. 4,500, meaning your friend will have to invest
Rs. 9,500 every month for the next 25 years to just catch up with you. This is the power of compounding.
I will budget for my expenses
This sounds hard to do day in and day out, but in reality it need not be so. Budgeting simply means you write down what you are going to buy before you go shopping. Add to that a general plan for monthly expense and you have budget. It can’t get easier than this. Think of it this way—you need to do just what our Finance Ministry does every year via the Annual Budgeting exercise, but only on a much, much smaller scale.
I will insure myself
Too many people neglect to get an insurance cover for themselves and their dependents. When tragedy strikes, it can devastate the family. Unless you’re sitting on top of a large corpus and don’t mind utilising it for emergencies, it would be wise for you to get insured. If you are a working adult and have dependents, you must buy a life term cover. You must have a health cover for every person in the family. And you must also buy a critical illness cover depending on health risks. If you use an automobile, always have a comprehensive insurance plan rather than a third party cover. If your family is dependent upon your income, you must also consider a permanent or temporary disability insurance which would support you financially in case you are incapacitated.