Being Financially FIt

We are in the middle of extreme summers and those who have planned their vacations know of the benefits of planning and the amount of effort that goes into getting it all right. Some have gone a step further to get their bodies in shape for those just right pictures to be posted on social media. But how’s your financial fitness? If it is a bit wobbly and you are uncertain, it could do with a little attention to get in shape with a few essential ingredients. After all, keeping financially fit is just as important for your well-being as physical fitness.

Almost everyone, at one time or another, has wished they had their finances a little more under control. And just like getting physically fit, the hardest part about getting your finances into shape can often be simply making up your mind to do something about it. In the following pages, you will find information and practical hints to help you understand and manage your finances. And the good news is that by reading this far, you have already made the much needed start!

Fist steps

When it comes to money, it starts with understanding your cash flow—money in and money out. Whatever be your life stage, what is coming in each month by way of income and what does it cost to run your household by way of expenses need to be well understood. Do not mistake expenses to include entertainment and vacation, but your housing, food, medical and life’s basic needs. To become financially healthy, you need to know your numbers— what you earn, how much you save and spend provides the basics for making good start.

Besides trying to pay for daily living expenses, you may need to buy a car, pay off debts, save for your children’s education, buy a home or take those annual vacations. These days it is also coming to come across people who need t look after aging parents to support. You may be going through a major event in your life such as starting a new job, getting married, raising children, or coping with a death in the family and your own retirement. Knowing your numbers is like going through a pre-workout routine of stretching—once you get everything properly aligned, you can proceed into building muscle in your financial life.

Make a start by writing down each of your goals, which you may wish to do by including your family members, if they are old enough to contribute meaningfully to this exercise. List out everything and don’t leave something out at this stage just because you don’t think you can afford it—this is your wish list and must have all that you wish for. Next, organise them into goals you want to accomplish within different time frames. For instance, you may wish to make the down payment for a house two years later, need money for child’s education 14 years from now and your retirement which may be 25 years later.

It’s important to separate each goal, because you save for short- term and long-term goals differently. Next, organise your goals in order of priority. At this stage, if you are just beginning your career, do not ignore retirement; do make it a priority. In fact, retirement should be among your goals regardless of your age. The reason to make retirement savings essential is because, for all other financial goals, you have the option to borrow, but when it comes to your retirement, you just can’t borrow.

Adding muscle

You need to build financial assets through investing. Investing can be a great way to strengthen your finances over the mid to long term, so you can enjoy a financially fit and comfortable future. However, most people assume that they need to be rich to invest. Not necessarily. Some of the most successful investors start small and watch their money grow over time. It’s easy to get started, but it’s also important to understand the basics of investing first. This will help you to make wise choices and avoid getting into financial difficulty.

But first, know that all investments involve some level of risk, although some more than others. In investing, risk is the likelihood that your investment may go down in value and that you may lose money as a result. Generally speaking, if the expected return from an investment is above average, the risk associated with the investment is usually above average. The lower the likely returns, the lower the level of risk; this is known as the risk-return trade-off. And, there are ways of managing your investments to reduce the amount of risk to which you are exposed, including diversification.

Diversification, is, spreading your money around and investing in different types of asset classes such as stocks, bonds, commodities and cash. Likewise, when investing, you should take a long-term view of your money to reduce the impact of short- term ups and downs, which is known as volatility on your investments. You could also invest directly in these asset classes yourself or you could invest indirectly through products such as mutual funds. When you invest in a mutual fund, your money is pooled together with that of other investors and is then invested by a professional fund manager on your behalf.

More importantly, regardless of where you choose to put your money — cash, stocks, bonds, real estate, or a combination of places, the key to investing is to make your money work for you through the power of compounding. You are probably already familiar with the principle of compounding. Money you put into a savings account earns interest. Then you earn interest on the money you originally put in, plus on the interest you’ve accumulated. Compounding investment earnings is what can make even small investments become larger given enough time. The real power of compounding comes with time. The earlier you start saving, the more your money can work for you.

Protecting your assets

Ask yourself how long would your money last if you were suddenly unable to work; even if it was just a few months? And how would your family or partner cope financially if you became disabled, or if you died? The intent is not to scare you with morbid thoughts, but to make you realise that the most important assets you have are your health and your income. Just as you insure your car, because it is mandatory, you also need to protect your health and your ability to earn money, for yourself and your family. Insuring your earning power can mean financial security if events take an unforeseen turn.

Make a start to tackle unexpected situations that could otherwise leave you in a spot. The best way to prepare yourself to handle unforeseen situations is to prepare in advance, when things are calm and you have time to think. This way, if a financial emergency strikes, you will be glad you took the time to put an emergency financial plan in place. Your emergency financial plan should include 3-6 months’ total living expenses set aside in a place that is readily accessible, such as a bank savings account. When setting this sum aside, include all expenses like EMIs, rent and any other essential expenses. Do not mix this money with your other savings and keep it separate, as this will help you avoid the temptation of dipping into it for other expenses.

The next emergency of consequence is one that is medical in nature. In case of a medical emergency, you should have an adequate health insurance policy in order to deal with the situation. Do make it a point to share the details of your health insurance policy with your spouse and family members. Chances are when you need a medical emergency; someone needs to know where the necessary documents and details are. So, leave the policy documents in a place where others can access it.

More importantly, if something were to happen to you, like a critical illness or worse, would your family have the financial protection they need for their future? One of the best ways to ensure your family’s needs are met if an unfortunate event should occur is to have adequate life insurance protection. Adequate protection includes both the right type of insurance and the right amount of insurance.

You should have life insurance if you are responsible for the financial well- being or contribute to the standard of living of your family. Life insurance would allow your family to maintain their standard of living if you were no longer there to provide an income. Yet, chances are most people either are inadequately insured or do not have the right type of life insurance policy on them. Do not assume life insurance to be a one-time buy and forget product, as your life stage evolves, so does your insurance needs. The insurance protection you need today may not be the same protection you will need in, say, 15 years from now.

Evaluating your protection needs in terms of short-term need and longer term needs can help you decide which products will work for you. For instance, if you have taken a life cover to protect the liability on a home loan that you have taken, you need it for a limited time till such time that the loan exists. However, if you are taking a cover to ensure lifestyle continuity for your dependents, you need to factor in the number of years they will need it for and inflation. You also should consider insurance for critical illnesses which are prevalent today and require a lot of money towards treatment.

Although every stage of life has its own financial considerations, it is important to review your financial plan as you go through the different stages. Knowing what financial milestones to hit when will help you to create and protect your wealth now and in the future. And, just like physical fitness, achieving financial fitness means you have to stop bad habits, create an exercise plan and do routine checkups for a worry-free financial fitness that will help you reach long-term success.

(A marketing initiative by Open Avenues)

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