Whether it is an unpaid bill or the thought of buying a house, money matters have churned almost everyone’s stomach at some point or the other. High income is often not enough to take away the worries. It’s a combination of habits and attitude that makes the difference between struggling with expenses and building wealth. While keeping spending within means and investment in high-return assets are the main mantra to build wealth, let’s explore the ways to do it.
Prepare A Budget
First things first. Allocate funds towards loan repayment, savings and spending, in that order. If the interest on your loan is higher than the interest on your savings instrument, you must tilt towards loan repayment than savings. A budget helps you to understand how your costs add up. And, it’s the best way to keep spending in control and prioritise saving. Divide your salary into a 30-70 ratio, wherein 30% can go into savings and the rest can be used for your monthly expenditure.
Set Financial Goals
To be able to save effectively, you need to know what you are saving for. Set your short-, medium- and long-term goals to identify your investment instruments correctly. Your assets would vary based on the time you have in hand to fulfil your goals. For example, for long-term goals such as life after retirement, you should invest in equity mutual funds, PPF, EPF etc. and for short-term goals such as buying a vehicle you can go for fixed deposits or liquid fund mutual funds.
Save For Emergencies
If you haven’t heard it already, you must have six-eight months’ worth your expenses saved up for emergencies such as job loss, prolonged illness, etc. Such unforeseen circumstances can easily deplete your savings. An adequate contingency fund is a must have to survive through rough patches without having to break your funds.
Save First, Spend Later
The key to building wealth is prioritising saving over spending. One way to do it is by locking away your savings and investments in the beginning of the month. You can set a standing instruction with your bank to have your savings transferred automatically every month. Mutual fund SIPs (systematic investment plans) and recurring deposits are some such options that allow you to invest in a disciplined manner every month. Once your savings amount is deducted, you can spend the rest on paying bills and other regular expenditure.
Avoid Needless Debt
Due to the easy availability of credit instruments such as credit cards and personal loans, people often end up getting into debt, overestimating their spending potential. Do not reach out for a loan unless it’s essential and can’t wait. Also have a repayment plan in place before you take loan. Timely repayment is important to maintain good credit score, as your borrowing potential is assessed based on your repayment behaviour. Defaulting or delay in repayment would reduce your chances of getting a loan in future. Avoid getting into debts to be able to repay another debt.
(The writer is CEO, BankBazaar.com)