By Abhishek Katti
A common pre-conceived notion that is prevalent amongst various communities is that savings can only be improved with reducing risks and expenditure over and above basic necessities. Infact there are certain coveted tenets about improving the standard of living along with keeping the bank balance intact. Before we elaborate on the 7 golden rules for financial wellness, let us run over a couple of situations that could be vaguely analogical to the management of savings.
We often come across runners, running in a marathon for long distances and tremendous amounts of time. If you were to examine closely swimmers too swim for tremendous amounts of time across canals. What we sometimes tend to overlook is the coordination that these athletes show when they manage their speed, maintain their breathing and keep up their stamina. What we need to note is that the sportsperson has his strategy intact before he even begins the race. This strategy is what we need to keep note of.
In the case of a runner, they always “maintain” their speed for a major portion of the distance despite the fact that they might be left behind by the other competitors. But, if the runner is steady with respect to speed and his breathing, he would be capable to run for longer distances as compared to the one who prefers running at variable speeds at the higher speed range.
What lesson we can learn from the runner is that, if we properly manage our finances, we may as well last longer than the first half of the month before the “melodious” sound of the message arriving on our cell phones stating that our salaries have been credited.
Everyone is familiar with the golden rules but it takes a lot of conviction and determination to follow and practice it on a daily basis. The 7 Golden Rules For Financial Wellness are as follows:
Creating A Dashboard Of The Current Financial Situation Is Most Important Amongst The 7 Golden Rules For Financial Wellness
According to Alisa Barcan, who is a personal finance expert and a contributing writer at the Harvard Business Review, it is important to gain a clear perspective of the current financial situation. To get a better perspective, we could make use of two famous business strategies such as the SWOT analysis and the Eisenhower decision matrix. But, in my opinion, such strategies are meant for situations when there is a possibility of a debt trap resulting from a great amount of debt.
According to Carla Fried who is a freelance journalist and also specialises in personal finance, one way to manage personal finances is to divide the income you receive after taxes in the proportion of 50, 30 and 20 percentages.
The first part should be spent on essential needs such as loans, mortgages, credit card bills or rent. The next 30% should be spent on wants which might include movies, dinning out and everything else that constitutes leisure. Finally, the remaining 20% of the income should be saved as an emergency reserve or probably for the purpose of making investments and planning your goals for the future.
Creating A Dashboard For Investment Portfolios
Of the 7 golden rules for financial wellness, the most important rule is to understand that wealth accumulation takes time and requires patience, unless the source of income is illegal from the point of the view of the law.
What is even more important is that before investing, you should always pen down the list of short term and Long term goals. This would get you motivated to save and your investments would compound giving you greater returns.
If were to look at assets, investors are usually attracted the most by gold. Real Estate seems the second most viable financial asset. These assets provide a means to park surplus funds. It is a well known fact that money should not be invested in only one form of financial asset such as equity or properties. The uncertainties fueled by changing governmental policies may put a lumpsum amount of savings under high risks.
Therefore, investments in debentures, mutual funds, PPF, preference shares is highly recommended. People who belong to the middle class are mostly inclined towards preference shares rather than equity due to the fact that it makes the investments vulnerable to losses.
An ideal rule that is sought after happens is the relationship between our age and the percentage of investments we make in mutual debt funds and equity shares. This rule dictates that the percentage of investment in mutual debt funds should be equivalent to our age and the rest of the investments should be invested in equity shares. Mutual debt funds includes a pool of fixed income securities such as corporate bonds and government securities.
Conduct Personal Research Before Borrowing
Of the 7 Golden Rules for Financial Wellness, the 3rd rule focuses on conducting an extensive personal research before making any kind of borrowing.
It is nowhere written that getting a loan sanctioned may put anyone in a risky position of loosing everything. The statement above makes sense only when the loan is “utilized” for luxury.
According to a CNBC report, no lender is interested in the ability of the repayment of loan by the end user and hence the borrowers are always offered with the upper limit of amount they can borrow depending on the documents they produce.
The key to building financial security is to borrow only what we truly need. In other words, the less we borrow, the more money we have for other goals. If we need a car, we might as well take out a loan for a model that happens to be less expensive because it would be imprudent to display the “borrowed” luxury in front of the world. It should be noted that loan should only be borrowed for needs such as education, house or gold against securities such as fixed deposits rather than real estate because once we purchase a car or an expensive laptop, its resale value falls.
Dealing With Surplus Savings Judiciously
When we open a savings account with a vision that we can park our surplus funds and start obtaining interest then we should consider parking a certain amount of our investments as surplus. With considerable inflation On the rise, the purchasing power of the existing sum decreases. Most financial advisors recommend that money should always be on the move and keep multiplying with minimal risks. I personally am of this opinion that fixed deposits are one of the secure ways to park excessive funds.
Money should be invested keeping in mind that only a calculated amount would be engaged in investments rather than the entire surplus amount. This ensures that even if there is a loss, we have considerable surplus of funds to fall back on.
Escaping Taxes Legally Is The Rule
We should always look at taxes from a positive viewpoint rather than perceive it as deduction of income which we pay to the government.
The income tax Department has certain provisions for the exemptions of taxes against the investments by an individual. These include investments in PPF, Bharat post and LIC insurance policies. There is a limit to the exemptions of 1.5 Lakh rupees under section 80C. But there are other sections such as section 80D (Health insurance premium) which might as well corroborate in strengthening the integrity of our financial independence.
Planning for tax-saving investments, tax payments and filing for returns should be maintained from the beginning of a given financial year with the proper maintenance of a calendar. This calendar would make you aware of new guidelines and avoid confusions caused by procrastination.
Is Getting All Risks Covered Important Amongst The 7 Golden Rules For Financial Wellness
All assets are ideally vulnerable to risks which we may not be able to predict. To be secured from such unknown risks, analysts and financial advisors advocate purchasing of insurance policies. The income tax Department also offers exemptions under section 80D
In terms of life insurance, it can be satisfactorily concluded that term life insurance is always recommended instead of a permanent life insurance. There is a basic difference between the two as mentioned on the ICICI Prudential website. Term insurance is the purest form of life insurance which provides higher assured amount at a relatively lower premium costs.
How Does Planning For Retirement Advocate The 7 Golden Rules For Financial Wellness
When its time to step off the work treadmill we would completely depend on our retirement savings. When it comes to planning for retirement, the two things that come come to our minds are bonds and stocks.
While bonds are safer ways to store money, the returns of interests are lesser.
Jack Bogle who is father of index fund, taught an entire generation about investing in stocks. He also founded the Vanguard. He said that investors should subtract their age from 110 and after subtraction the remainder is the percentage that they should invest in stocks. Another thumb rule that Jack gave was that investments in stocks should be made for the long term . He dissuaded frequent trading.
While the value of bonds do increase, it is not able to fetch returns as high as what you would have received from stocks. If we take inflation into consideration, the stocks fetched returns good enough to beat inflation.
As a concluding remark, it would be recommended that important decisions should be taken after considering the advice of different senior citizens and friends especially those who have served the Government as they have experience and would best know about the different financial tips you could adopt.
This article is authored by Abhishek Katti. He is a graduate of technology from NIT Allahabad. He writes about topics such as economy, financial planning, investments and wealth management.
To get more insights on the topic, do go through another interesting article – Financial Plans for 2021.