5-week challenge to stay on top of your finances

The mathematics of sound money management is simple. The basics have been well-documented and passed down through generations. All you have to do is spend lesser than you earn. Also, you should look to make early investments so as to benefit from the magic of compounding.

When you envision the process, it does not seem all that difficult and yet, most people do not achieve their financial dreams. Ever wondered why? The answer lies in the emotional and psychological hurdles that one has to endure to realise their dreams. You should stop looking for secrets or shortcuts to financial success, because it is the simple strategies that actually work.

Here, we have laid out a 5-week challenge that helps in breaking down complex investment goals into easy-to-do tasks, one task that you can ease into each week. By continuing on the plan, you are headed towards financial success.

Your daily lunch takeaway or regular after-work drinks with friends may seem to be small expenses that do not add up to anything significant. But this week, your challenge is to give up one of those inconsequential purchases in an attempt to kickstart your savings. If you find it too difficult to cook lunch in the morning, don’t fret. You are trying this out for only a week. The next week, you can bring back the takeaway and find something else you can do without. Maybe swap the lunch takeaway with the gym membership and try to stay in shape by exercising at home (for free). In case you are feeling really ambitious, you can also explore options to add a new cost-cut each week while retaining the old strategy and check how that feels.

Whatever it is that you are sacrificing, you should keep track of your savings and check out the total at month-end. Now that you have cut ties with some routine purchases of the past, you may be ready to break away from these habits for good - implying more savings in the long term.

You should be aware of the fact that credit card dues are referred to as bad debts. This classification of debts into good and bad is based on the purpose for which the loan was taken in the first place. So, good debts are the ones that finance the purchase of a commodity that provides you long-term returns or increments in value over time. For instance, when you take a personal loan to fund your further education, you are enhancing your skills and paving way for better financial prospects. Taking a home loan to fund the purchase of your dream home is also an example of a good debt. This is because property costs are always on the rise and the value of the property after a significant amount of time would be more than the actual loan amount and interests paid.

The purpose of a credit card debt could be the purchase of a tangible object that may not increase in value over time. So it is best to set aside the plastic and use cash or payment wallets for your purchases instead. This way, you will also have better control over your spending and be able to banish impulse buys.

If you are not an investment-savvy person, this is the week to work on that. There is a host of financial literature on the internet advising you on prudent investment strategies. If you are not disciplined in investing in debt or equity instruments independently, you can choose to buy a life insurance plan that provides you protection and investment benefits under the same product. Alternatively, you can get in touch with a qualified investment advisor who will chalk out a suitable investment strategy for your goals.

When looking to invest for the future, insurance is a very important tool in your financial arsenal. Insurance is basically a contract that financially protects you from unprecedented events in exchange for a premium that you pay the insurance company. You can look to buy a health insurance plan that safeguards your family from a medical diagnosis that has devastating effects on the finances of the household. You should note that taking health insurance early in life has significant benefits that you should not miss out on.

In case you are in possession of a vehicle, remember to take adequate motor insurance to protect the vehicle from mishaps on the road. Motor insurance policies are available with limited coverage at a reduced cost. This type of insurance is referred to as third-party liability insurance. In case you do not use your vehicle too often, you can choose to buy third-party liability coverage to save on motor insurance premiums.

It is now the perfect time to check your net worth, which is essentially the difference between your assets and your liabilities. Assets are components that you own and liabilities are what you owe. Knowing your net worth gives you an indication of your overall financial health.

In order to get your net worth, add up the value of all your possessions. This includes savings account balances and fixed deposits, retirement balances, real estate, jewellery, and cars. From that number you should subtract all the money you owe, i.e., student loans, credit card dues, home loans, etc. The number that results is an indication of your net worth.

In case your net worth is smaller than you had expected, don’t worry. You can devise a plan of action to grow it while meeting your short-term financial goals. You should also remember to regularly check your net worth (either once a quarter or twice a year) so that you can see how you are progressing. When you see an improvement in your net worth, you will be motivated to stick to your savings plan for the long haul.