Creating a strong financial plan is about understanding your current financial health and taking necessary actions to reach where you want to be in the future. Here are six money habits that will lead you to a stronger and healthier financial life.
Prepare a financial plan
Financial planning is the process of allocating your monetary resources for achieving various life goals. These goals can be your child’s higher education or marriage, post-retirement expenditures, down payment money required for buying a house or a car, etc. Start by calculating your financial net worth and list down the monetary value of each of those goals, after factoring their time horizons and inflation. Use SIP calculators to find out the monthly contribution required and explore the possibility of reducing your expenditures, in case of a shortfall. While allocating your contribution to various financial goals, do not neglect your emergency fund or your post-retirement corpus.
Set your asset allocation strategy
Next is to implement your financial plan by distributing your investments across various asset classes, such as debt and equity, according to your risk appetite and the time horizon of your financial goals. Investment for goals maturing after five years should be invested in equity mutual funds as equities outperform other asset classes over the long term. Similarly, investment for goals maturing within three years and 3-5 years should be invested in short term and hybrid funds respectively, as equity funds can be very volatile over the short- and medium term.
Get adequate insurance cover
Most of us confuse insurance as an investment instrument. As a result, we end up investing in unit-linked insurance plans, endowment policies, money back plans, etc., which have high expense ratios while providing very little cover. Instead of buying such life policies, stick to term plans for your life cover. These policies can easily provide a life cover of 15 times of your annual income at a fraction of the premium charged by other life policy types. Also buy health and personal accident policies to protect yourself from high medical costs and loss of income due to disability.
Automate your bill payments
Not all of us are good with remembering multiple payment dates and managing paperwork. While missing utility bill payments will cost you in terms of late payment fees, missing EMI and credit card bill dates will cost your credit score and future loan eligibility. Hence, set standing instructions in your bank account or credit card to automatically deduct your insurance premiums, EMIs, utility bills, credit card bills, etc., on preset dates.
Use credit cards for daily expenses
Making payments through credit cards is equivalent to taking loans. Thus, credit card transactions are reported to the credit bureaus and timely repayment increases your credit score too. Hence, use credit cards to make payments and ensure their bill repayment by the due date to build or improve your credit score. However, make sure to contain your credit card bills within 30% of your total credit limit as doing otherwise will pull down your credit score.
Reduce your debt burden
Falling interest rates and improved access to retail credit entices many to avail loans for consumption. As a result, increasing number of people are saddled with multiple EMIs at various rates, leaving little scope for any investment. The best way to come out of such a situation is to avail a bigger loan at lower rate, longer tenure and other favourable terms and use its proceeds to prepay the costlier ones. This process is also known as debt consolidation. Top-up home loan and home loan balance transfer are the best debt consolidation options for existing home loan borrowers while others can consider loan against property, loan against securities and personal loan balance transfer depending on their loan eligibility.
The writer is CEO & co-founder,