Happiness is “Salary of INR xx,xxx credited to a/c xxxxXXXXxxxx”. You’re either jumping with joy because it’s time to party or (and I suspect this is the case most of the time) you’re going ‘Phew! Just in time.’
Too much month left at the end of money? That’s a red flag, my friend, one you should attend to on priority.
Why? If you’re living pay check to pay check, you might need to tweak a few things here and there, so you can secure your future financially. After all, at some point you will retire, and would you really want to depend on someone else for financial support?
Let’s look at financial security and why it is important
Financial security is the state of being you reach when you aren’t worried about any expenses that arise regularly or may arise in the future. This means your income covers your expenses and you have enough saved for emergencies and future financial goals. Being financially secure is important, as this means you’re not just making ends meet, but are prepared for any situation.
Now, if that’s not where you are, that’s where you can (and should) be, with a few small modifications to your lifestyle. Here’s how you can get started:
Set a monthly budget
The first step would be to identify how much you spend every month. Some of these expenses are recurring (rent, bills, groceries, etc), while others aren’t (travel, movies, other recreational activities). You also need to set some aside as savings. Use these as a starting point to setting a budget and sticking to it.
Here’s the thing. It’s easy to say “I’m going to spend only Rs. 2,500 on recreational activities”, but when you’re having fun, you may break your resolve. You may also be tempted to spend more than you earn, thanks to the convenience EMIs and credit cards give you. But do watch your expenses and make sure you stick to the budget you’ve created. You don’t want to end up neck-deep in debt, do you?
To chart out a plan to put your salary to the best use, read Give your salary the power of 5!
Be prepared for the unexpected
Life is unpredictable, and it’s best to be prepared, for yourself and your family. Three things that top the list are Emergencies, Unforeseen Expenses and Death.
You may lose your job, or there could be a medical emergency and your insurance may not be enough. It’s best to save up to 6 months’ (or more) worth expenses in an emergency fund. Do not touch this unless it truly is an emergency. House repairs, replacing appliances, etc are not emergencies, but unforeseen expenses, and should be taken care of with funds that are not a part of your emergency fund.
As for death, we all know that eventually unto dust we shall return, and though there are medical advancements to prolong life, death may strike at anytime. Getting insurance is of paramount importance as you’d want your family to be able to live comfortably, after you pass. Get a term insurance plan whose policy sum assured would be enough to ensure your family is well taken care of. However, make sure you’ve also invested in other avenues like mutual funds or deposits, which can further help your family.
To read more on how to prepare for death, read Preparing for death: Key financial decisions to protect your loved ones in case of your demise.
Plan for your future and invest for it today
Savings just won’t cut it. You’ve got dreams you want to fulfil and if you keep saving for them little by little, you’re going to take so much longer to achieve them. Instead, invest in instruments that could give you higher returns – equities, mutual funds, corporate fixed deposits and the like. If you’ve no experience with these, you can always consult a financial advisor and get started. Mutual funds can give you higher rates of return, compared to traditional products like bank savings accounts, fixed deposits, recurring deposits, post office schemes, etc. They are also managed by professional fund managers, are less volatile compared to equities, give you liquidity and diversify your investment across various securities.
Treat investing as a regular expense and the little you set aside for your dreams every month can get you closer to them, faster.
Plan for retirement
Twenty years until you retire? Or longer? Whatever the case, when it comes to retirement, just like you would with an emergency fund, diligently set aside money for your golden years. The earlier you start, the more your money compounds. Starting way before you retire allows you to put your money in equity mutual funds (for great growth) and as you near retirement, you can systematically transfer them to debt mutual funds (for capital protection).
If you’d like to start planning for retirement now, you can check out Cheat sheet: How to retire in 20 years (or less).
Plan tax savings
Tax laws allow you to claim deductions on taxes on your income, so why not be smart about it and utilise them? Under Section 80C of the Income Tax Act, 1961, you can claim a deduction of up to Rs. 1,50,000 on your income if you invest them in prescribed instruments. You won’t just be saving on taxes, you can also earn returns on your savings if you invest smartly. Of all options available under Section 80C, Equity Linked Savings Schemes or tax saving mutual funds come with the lowest lock-in of 3 years, and have the potential to deliver higher returns than the other options. The returns on these are also not taxed, unlike tax saving fixed deposits. Under Section 80CCG, you can invest an additional Rs. 50,000 in NPS and save even more on taxes.
To read about how you can save on taxes under, check out FundsIndia Explains: Section 80 C investments.
Become financially literate – Financial literacy will empower you to make the right financial choices for your goals and add to your financial security. When you know what your options are, you have a wider base to choose from and do what is best for you. Read up, try to understand products and grow, just like your money will when invested in the right avenues.
Your friendly financial advisor will always be there to help you on the path to financial security, and with these things on the checklist done, you’ll be in a better place and have a happier, stress-free future.