Last Updated on 01/01/2021 by Deepak Singla
You ran a mile or ate protein today for your Fitness Health. But what about your financial health? They say ‘Health is wealth’ but is health really enough to build wealth? Well, the answer is NO. Just like exercise is crucial for your body fitness and health, good personal finance decisions and understanding the basic financial terms are equally important.
Every decision you make right now, be it a home loan, start investing in Best SIP Plans, or simply purchasing that new pricey dress via credit card affects your financial health. So, what do you need to do to be financially healthy?
Let’s explore some basic lifestyle improvements you can make towards it. But first, get familiar with the ultimate fitness regime for your financial health. When is the right time to start? Let’s delve into the importance of sustainable financial health.
Financial Health: Definition and Significance
Financial health defines a person’s monetary state and well-being through the personal finance decisions they make. There are many aspects of one’s financial health: How much they are saving in a month? What does a monthly budget look like? How much are they putting away for future goals or what is the current debt they owe? All this and more define how financially strong you are.
Strong financial health looks something like this- You have paid off your debts, have a good credit score, steady flow of income, rare changes in expenditure, strong return on investments made, and a growing cash balance. If your finances don’t really look like this, you need improvement.
It is ardent because all this planning and decisions eventually lead you to a path of financial freedom, where you can enjoy life without having to worry about the source of your next cheque. The core path to achieving financial independence revolves around starting early, investing smart, and planning for the future.
Early steps for Financial Independence
It’s okay if you haven’t started yet. It’s never too late to join the path of financial freedom. Let’s discuss how to get started for building sustainable financial health:
1. Know the Basics
Another day passed by when we did not apply the school taught algebra in real life. Only if they taught important lessons like managing money or paying taxes!
Take one step at a time while managing your money. Start with making a budget. It gives you clarity on where and how much you’re spending. A budget is not just a written plan of expenses but also a view of corrective measures you can take. It highlights areas you can cut the spending on and make space for saving. And hey, you don’t need to do it all alone; you can take the help of various personal finance apps to allocate your money in the right ratio.
Have you heard of the 50-30-20 rule? It’s a thumb rule of money which states that you should allocate in a way that 50% of your earnings go to your needs i.e. the living cost, 30% to wants for luxuries, and the remaining 20% to savings.
Getting familiar with the basics of money management is not a day’s work. Like you can take small steps at a time. Read one article, follow one piece of news, and make a small investment. It’s a road that automatically shows you the way as you move along!
2. Identify Financial Goals
Before making any financial decision, you need to ask yourself the question of Why? Why are you saving this money? What do you plan to achieve and in how much time? Set your goals and assign them a time period. You want to invest for your child’s marriage or you want a stable flow of income after your retirement or you want to make yourself debt-free in the next 5 years.
Goal clarity is very important when it comes to financial planning. Building wealth takes patience and persistence. Set SMART goals for your financial health i.e. Specific, Measurable, Achievable, Realistic, and Timely.
3. Learn to Say NO
To that Friday movie when you’re broke or that super-expensive bag on sale. You need to learn to say no to yourself. Recognize your needs and wants and allocate the money accordingly. If it’s going out if your ‘want’ budget DO NOT BUY IT.
For example, having a car is a need, but going for a luxury SUV is a want. Sacrificing saving or investment money for some temporary satisfaction is not a wise choice. We know it’s not easy. But as mentioned before, plan it out, keep a tab of your cash inflows and outflows and you’ll be fine. You can also read some personal finance books like ‘Rich Dad, Poor Dad’ or ‘Think and Grow Rich’, etc. for inspiration.
4. Invest Early
It’s never too late, but the sooner you begin the better. All because of the magic of compounding. Albert Einstein did. He referred to it as the ‘Eighth Wonder of the world’. Compounding refers to the reinvesting of the capital profit back into the market. The longer the money is reinvested, the more it is likely to grow.
To understand the importance of starting early, Let’s understand the power of compounding in a simple way. Suppose, Sachin starts investing Rs.10, 000 per month at the age of 25 and Robin starts at the age of 30. In this scenario, Sachin shall build a much bigger corpus than Robin. All this due to the power of compounding!
5. Build a Good Credit Score
A credit score demonstrates your entire banking history which affects all the aspects of your life in the long run. Be it applying for a home loan, starting a new business, or applying for a job, everyone looks for your credit score to determine how well you handle your finances. You need to have a good credit score to live life comfortably and how to start that?
Not just paying off your debts but paying them on time. A late receipt does not reflect well on your professional career. Set EMI and SIP payment reminders, ensure the maintenance of older credit cards or link them into one for convenience and buy only what you can easily pay off. Taking up too much credit at a go can get you into a pile of never-ending debt, do not make that mistake!
6. Act Frugal
“Don’t save what is left after expenses but spend what is left after savings”– Warren Buffet
Acting Frugal does not mean you don’t spend on your lifestyle, it just means you spend it mindfully. There is no shame in being rich but spending cautiously. It shows that you value what money can buy and choose to utilize it optimally. More money does not guarantee better quality, research does. So, choose your battles and decide what you’re spending is worth it or not, before making the transaction.
7. Review and Revise
A regular check on your finances ensures that you’re on the right track. To review your financial health asks yourself the following questions- What is the current state of my portfolio? Are there any pending debts I need to pay off? Am I with time for my short and long-term goals? Do I have an emergency fund? Am I financially secured/insured?
If you’re getting consistent positive answers to them, Congratulations! You’re doing a good job. And if not, it’s time to make a change. Analyze what aspect of your financial health needs improvement and work upon it.