Of the many quotes on financial wellbeing, Jack Benny said it best, “Try to save something when your salary is small; because it is impossible to save after you begin to earn more.” It is paradoxical, but true. Saving money is a habit that has to be built early to ensure complete financial well-being. Here are seven key steps.
Chart your short term and long-term goals
The best route to financial wellbeing is writing your goals on paper. A goal is a dream with a financial number to it. Saying you want to buy your first home may be your dream, but that is not enough. Here you get down to brass tacks. How much money I will need for the down payment? How much will I fund through loan? Initially in your career there may be more short-term goals like buying a car or funding your own marriage. Being shorter term goals, plan them through low-risk debt funds. Retirement may look like a distant goal, but time actually flies. So, it is equally important to pen down how much you need after retirement. By starting early on long term goals, you can leverage time and the power of equities.
Start early, start small; but stay invested
When to start investing? There are no ground rules, but start saving and investing with your first pay cheque. Just look at this comparison. A person who invests Rs 20,000 a month at 15% for 5 years; allocates Rs 12 lakhs; which grows to Rs 18 lakhs after 5 years. That is a wealth ratio of 1.50 times. By investing Rs 5,000 a month for 20 years at 15%, the allocation is still Rs 12 lakhs, but the money grows 6.33 times to Rs 76 lakhs. In both cases, allocations are the same, but wealth effect is vastly different. In the second case, money compounds longer. So, start early and stay invested.
Be consistent and disciplined
When it come to your complete financial well-being, consistency and discipline have two connotations. Firstly, investors must adopt the SIP approach to long term MF investing over lumpsum investing. That way, rupee cost averaging works favourably. Secondly, it calls for discipline in spending, managing EMI outflows and conservatism in debt levels. Consistency and discipline work best when you start early, so that time works in your favour.
Regain control of finances by making savings a habit
Roger Babson put it aptly, “Individuals should tell their money where to go; rather than asking the money where they went”. For control over finances, the household budget comes in handy. It tells you where each rupee comes from and where each rupee goes. There are two steps to regaining control over your finances. Firstly, get rid of high cost debt as it destroys financial wellbeing. For justifiable debt like home loans, car loans etc, monthly EMIs must not exceed 40% of total income. Secondly, gain control over finances by squeezing maximum savings out of your inflows. Making savings a habit, not a choice. Like Warren Buffet rightly says, “Do not save what is left after spending, but spend what is left after saving”.
Shock proof your wealth
Once you create a corpus, the first priority should be to protect wealth from external shocks. Most exigencies are not in your control, but you can still shockproof your wealth. Having an emergency fund worth 4-6 months of earnings avoids unnecessary drawdowns. Secondly, life insurance and medical insurance does away with most cyclical uncertainties. You can top it up with asset insurance and liability insurance. Earlier you start, more time you have to action Plan-B; in case Plan-A is not working.
Ensure freedom to make choices later
In army parlance, the more you sweat in peace, the less you bleed in war. A good barometer of wellbeing is having the freedom to make choices. Most people make compromises and give up free choice through their working careers. It is still worth the trouble if you can have the freedom of choice later. At 60, you don’t want to worry about your next month bills. Ideally, being debt free by the time you retire, gives more leeway. Freedom is also the ability to take off to the hills, without worrying about actual costs or opportunity costs.
Measure yourself against milestones
From plans to goals, the entire journey is about ensuring complete wellbeing. For this journey to be fruitful, you must start early and define milestones. You cannot leave 25-year goals on auto-mode. It has to be achieved through periodic milestones. Your responsibility is to benchmark progress against these milestones and take corrective action where required. You are set on your path to complete financial wellbeing!