Evaluate your Financial Health
Money comes in, money goes out. For many people, this is about as deep as their understanding gets when it comes to personal finances. Rather than ignoring your finances and leaving them to chance, a bit of number crunching can help you evaluate your current financial health and determine how to reach your short and long-term financial goals.
As a starting point, it is important to calculate your net worth - it’s the difference between what you own and what you owe. Your net worth represents where you’re financially at that moment, and it is normal for the figure to fluctuate over time. Calculating your net worth one time can be helpful, but the real value comes from making this calculation on a regular basis.
Track and Manage Expenses
Tracking your expenses will act as a basis for nurturing other financial habits. Often, we lose sight of our spending simply because we fail to track the money going out every single day. To avoid over-spending simply setup a spreadsheet or just buy a small notepad that you can write in every single day. You can then categorize your expenses and prioritize on your future spending.
As people advance in their careers and earn higher salaries, there tends to be a corresponding increase in spending, a phenomenon known as lifestyle inflation. One of the main reasons people allow lifestyle inflation to sabotage their finances is their desire to keep up with the Joneses. The consequent term “Urban-Broke” also recently buzzed social media, highlighting the cons of splurging under peer pressure. Thereby, managing your expenses rationally can help you avoid this unnecessary expenditure and its consequent debt.
Set clear Financial Goals
One of the best ways that you can improve your finances is to set clearly-defined financial goals. Your goals can’t simply be to have or make more money; they have to be real and measurable.
Your long-term financial goals should be your ideal big-picture. Once you have the long-term goals defined, go about setting the short term ones as well. When you set a year long financial goal, the milestones are what make up the gaps in the year. For example, if you’re looking to pay off Rs 1,00,000 of debt within 12 months, you could break that down into monthly and weekly milestones.
Prioritize Debt Payment
One of the biggest deterrents, financially speaking, is the overwhelming debt that most people face. When you’re faced with enormous debt, it’s hard to concentrate on anything else. It’s also easier to avoid looking at bank account statements. But, the sooner that debt is repaid, the better you’ll feel. And, like everything else, debt repayment builds momentum. Once you get in the habit of paying off debt, your overall spending will fall in line with it.
Buy Insurance and Maintain an Emergency Fund
You may or may not receive health insurance from your employer or if you’re self-employed, buy health insurance even if you are healthy. If you are in a bad car accident or any such emergency, your medical bills could easily wipe out your life savings. Also, a term insurance can help you save along with securing your loved ones financial future with assured death benefit during the term or maturity amount at term end. Term insurance is one of the cheapest insurance covers if started at a young age.
An emergency fund is just what the name implies: money that has been set aside for emergency purposes. The fund is intended to help you pay for things that wouldn’t normally be included in your personal budget: unexpected expenses such as car repairs or an emergency trip to the dentist. It can also help you pay your regular expenses if your income is interrupted; for example, if an illness or injury prevents you from working or if you lose your job.
Thereby, by embedding these habits in your life you can be assured of being more diligent and rational about your financial decisions.
The author, Rajas Pendnekar is a Blogger at IIFL.