Open | 07 Feb, 2019
New Year tends to bring with it its share of resolutions that tend to be hard to keep, but what you are going to read in the following pages is to do with financial fitness for your wellbeing. Not only will you be able to know about keeping financially fit, you will also be able to have full control over your finances. But remember, the only common aspect about fiscal fitness with physical fitness is to put your mind to it and make a start. And the good news is that just by starting to read, you have already made a start!
We live in a time when most average households are servicing some form of debt, which makes savings take a backseat, forget planning future finances. It is also a phase when future employment is uncertain and retrenchment a possibility at anytime to anyone. Despite the availability of a wide choice of financial products, levels of financial capability are low, and many of the solutions and products do not necessarily automatically fit into the manner in which consumers think about their finances.
The dependence on earnings from a job is immense, with little planning going for the future. As a result, most people have a strong tendency to ignore the future and live for today. Planning their finances is usually far from the top of their priority list. While one must take a more pro-active approach to control their finances, there are many who start with this intent but falter as they are unaware of the simple habits which can help them follow this approach more efficiently. Handling finances can be a difficult task and it is essential to inculcate prudent habits when it comes to money matters. Lack of planning of your finances results in situations when one is unaware of where the money goes or a constant feeling of being broke. But when planned right, your finances can help you enjoy a comfortable existence without the worry which accompanies living from paycheque to paycheque. Financial fitness basically means planning well in advance and investing in areas where you can expect above average returns or achieve your future financial goals. It also means having complete knowledge about the money you have and how you can make it grow best.
When it comes to financial planning; it’s better to act early and often to regularly assess your situation, goals and the structures you have in place to accomplish them. Effective and consistent planning is about three core ideas – control, understanding and aspiration. With planning that starts early and hits all the right notes, you have the potential to exert more control over your future than if you lack such focus. Unfortunately we all have busy lives in which immediate issues usually trump more remote ones, especially when it comes to planning for future financial goals.
Start by saving and make your financial fitness programme pay off. A healthy savings plan can be the key to achieving your financial goals and making your life easier and more enjoyable. Next, build financial assets through investing, which need not be with a big sum; start small, but be consistent and regular with your investments with a clearly defined future financial need or goal, which is quantified and marked with a specific timeline. It’s easy to get started, but it’s also important to understand the basics of investing to help you make wise choices and avoid getting into financial difficulty.
Spend time to understand what risk-adjusted returns mean and what is your personal risk quotient? Many people inherently feel they cannot take risks with their monies, this is similar to someone ailing tell the doctor that they can’t take medicines because they taste bad. Nobody likes to take risks, but you need to take them. For instance, just because a bike brushed past your car, does not stop you from driving the car – the same way, a few dips to your investments does not mean you stay away from taking any risk with them.
You can optimise the risks that your investments are exposed to by diversifying your investments across asset classes such as debt, equity and cash or cash equivalent. Likewise, when planning for your financial future, you should identify goals and put a price tag to them. Breaking down your financial needs into tangible goals is a good start and further earmarking investments towards them is the most ideal way to achieve the goals.
Staying financially fit
The idea is to have a holistic mindset when it comes to your finances – do not get into planning only to save taxes, look for ways to optimise them and align them with your financial needs. Develop healthy financial habits such as balancing spending, avoiding living paycheque to paycheque or depending too much on an income stream for future financial needs. Today, most people get trapped due to peer pressure by spending more because of their jobs, because certain jobs and career tracks can indirectly lead to your spending more.
For many people, especially first-time employees, this lifestyle inflation happens unconsciously. One day they’re broke students surviving on a diet of instant noodles, and the next they are suddenly able to apply for credit cards and buy the latest mobile or that Oakley glasses they have been fancying with their paycheques going to fulfil some of their aspirations, before it becomes a compulsive habit.
Your financial resources affect not only your ability to reach your goals, but also your ability to protect those goals from potential financial crises. These are also the resources you will draw on to meet various life events. Make a start this year by getting into the habit of prioritising your finances, take action and take control of your finances for a fit financial life.
9 Tips for Financial Fitness
Like anything else, it is up to you to take full control of your financial future and the following ideas can at best help you make a start.
Onus is on you: You are responsible for your money actions. For a start, keep a budget, review it regularly and make sure you include a plan for regular savings. By knowing what you earn and what you spend, you will know where you stand and where you are heading.
Being realistic: Follow the first rule of money – don’t spend more than you earn, and only borrow what you can realistically afford to repay.
Keep track: Maintain records of all your financial transactions in one place such as bank statements, investment statements, insurance policies, pension details, PAN and other financial details. Do check these statements regularly to know charges being levied or fee being paid or inconsistencies. Seek help to understand anything in these documents that you do not understand from the right authority.
Plan ahead: Draw up a financial plan, marking out your financial goals, and needs, especially your retirement. Take adequate insurance: It’s not just your life; you should take adequate insurance to protect yourself against health-related expenses as well as your assets – car, home and gadgets.
Invest in equities: Understand the difference between real and nominal returns as well as investment risks. This way you will be able to invest in appropriate financial instruments that are suitable for different time frames and can be mapped to your future financial goals. Definitely have equity investments as part of your retirement plan.
Understand costs: There are no free lunches and it is true when it comes to financial instruments as well. Ask about charges, fees and costs associated with financial products before blindly signing on to them. Remember; fee and charges are seldom one-time and over the long-run can impact the real returns on your savings and investments.
Seek expert advice: You are not bound to understand the intricacies of financial instruments and their workings. Just as you take professional advice on matters of health; meet financial advisors to understand what you pay for and what you get and suitability of the same.
Learn: Take time to understand about finances and don’t feel embarrassed to ask people for explanation about things that you do not understand.
Avoiding financial setbacks
Time was when financial setback was losing a job or one’s health being impacted adversely, impacting their ability to earn or maintain their earnings. Today, financial setbacks strike in different ways and much early, especially when it is to do with easy credit leading to unmanageable debt. High debt and spiraling credit card debt makes it difficult to save and invest, leading to shortfall in savings for financial goals, especially retirement.
Figure out how much is too much before you actually get into it. A simple process is to add up the EMIs you pay towards car, house and other items that you have taken on a loan each month. Include credit card dues to this list as well. Next, divide this sum by your monthly income to get what is known as your personal debt ratio. Although an ideal debt that one can take will vary, but it is a good start to have no more than 40-50 per cent of your monthly income to service loans.
While addressing loans, understand the difference between good and bad loan. For instance, asset creating loans such as one taken for a house or financing education is good. A house is a financial asset that you will own at the end of the home loan tenure. And, in case of education, the loan helps you specialize in a field which is linked to your future earnings potential and hence falls under the good debt head. Now contrast this to bad debt which is the money that you borrow for things that don’t necessarily provide financial benefits or that don’t last as long as the loan. This includes borrowing for vacations, clothing, furniture, and even dining out.
Getting out of debt trap
First, never get into high-interest loans or opt for loans that come unsolicited. These days every mail and message comes with a pre-approved tag, which is not a healthy sign. Just because someone is lending to you easily does not mean you need to take it. Likewise, the pay-day loan is another poor choice because not only does it indicate that you are living beyond your means, it also means you land up paying interest on the loan which will be difficult to repay later.
Learn to handle credit cards and credit wisely. Repay the loan repayments in time and never rollover the repayment. When it comes to credit card, do not keep more than one or at max two of them. Likewise when looking for a loan, shop around to look for a lender who charges a lower interest and also has lower penalties in case of delayed repayments. Importantly, on the first sign of finding it difficult to manage loans – seek assistance of a debt counselor who will be able to help you out of a debt trap.
(A marketing initiative by Open Avenues)