We all meet our ends. But there is a difference in just meeting our expenses and managing money well. Managing money well today helps you secure better financial stability in the future. You don't need to be a financial advisor to do some simple things that can save you in time of crisis and prepare for your future. Youth normally avoid talking about money. Some times just the talk makes them look the other way. It is natural when you are young. However, it is extremely important that some simple things are understood early.
The year 2020 has been quite different from previous years. What started as a year of hope and aspiration, quickly transformed into an event that has changed our lives forever. Goals set at the start of the year, have undergone tremendous change in the span of a few months, thanks to a virus that literally brought global economies to a standstill, halting production and resulting in job losses and pay cuts.
As the search for the all-elusive vaccine continues, the remaining few months of this year, is the time to draw a roadmap to financial independence and become ‘Aatmanirbhar’, to achieve our milestones and goals. On this Independence Day, let’s see how you can do so and embark on this all-important mission.
1. Learn to Manage Your Own Money
The first step towards attaining financial freedom, is to learn the art of managing your money and not leaving it for someone else to do. Contrary to popular belief, money management is not difficult, provided you take a keen interest, in educating and disciplining yourself.
The first step to doing this is to formulate a budget and sticking to it. Equally crucial, is distinguishing between your needs and wants, keeping the latter to a minimum. In the age of digitalisation, there are several apps through which you can chalk out a well-rounded budget that covers all aspects with ease and convenience.
While you can always seek advice from peers and relatives on various aspects of money management, don’t blindly act upon their suggestions. If at all you need guidance, seek advice from an expert.
Also, the current pandemic has made us realise the essence of stemming our spending binges. This should be different even otherwise. Life-style related debt not only derails your budget, but also leads to compromising on crucial goals. Worse, it can push you into a debt trap.
2. Save and Invest
Savings and investment, are two fundamental pillars of financial independence. While savings help you overcome any liquidity crunch, investments are necessary to activate your money to create wealth and compounding it further to achieve your life goals.
Strive to save at least 20% of your monthly income and channelize 10% of this towards different investment avenues. While you can invest in fixed-return instruments and debt products for short-term goals, bet on equities to meet long-term objectives such as your children’s higher education and retirement.
Starting early gives you an advantage, allowing your money to grow and bring into play, the power of compounding, a disciplined investor’s best friend.
Financial self-reliance often falls prey to an investor’s own biases and beliefs, that are far removed from reality. Confirmation bias, loss-aversion bias, herd mentality bias and recency bias, are some common biases engulfing investors, restricting their ability to think independently and take practical decisions.
Delving deep, understanding the fundamentals and adopting a rational approach, can help you overcome these biases and make informed choices. It’s essential to see the big picture and push yourself out of your comfort zone to capitalize on opportunities that you may not see clearly when biased.
Be Financially Ready for Handling Emergencies
One of the profound lessons taught by this pandemic is to be always ready for emergencies and have a contingency corpus in place. Additionally, life and health insurance can help you overcome financial adversities and prevent your savings from taking a hit.
An emergency corpus equivalent to six to eight months of expenses coupled with insurance, can help you navigate choppy waters smoothly. Review your portfolio, make provisions for this corpus and ensure you invest in comprehensive and adequate insurance, both for life and health.
5. The Final Word
While the road to financial freedom and self-help is a long drawn, it’s time for you to act on it right away and take necessary measures to ensure success. This Independence Day, let us pledge to work towards our own financial independence.
Happy Independence Day. Jai Hind!
(Author, Rahul Jain is Head-Edelweiss Wealth Management. Views expressed here are his own.)