Dussehra is a festival to celebrate the victory of good over bad. And that calls for some self-reflection to identify the good and the vices in us. Take inspirations from the mythological tale of Rama killing Ravana, and slay the vices in you to become bigger and better. In that spirit, let’s look at some bad money habits you must get rid of to preserve your financial health.
A budget helps you keep tab of how much you have and what your necessary expenses and commitments are. So you know how much you can spare for shopping or traveling. Budget is key to money management. Allocate money for your savings and expenses at the beginning of the month and stick to it to control spending beyond means.
No emergency fund
No one thinks of crisis on a good day, but emergencies appear unannounced and you don’t want to be caught off guard, if you were to face a sudden job loss or a health hazard. All your savings could be drained and you could fall in a debt trap, if you didn’t have a separate fund to protect you financially against unforeseen circumstances. Set aside a fund worth six to twelve months of your monthly income to be able to pay your bills and take care of rent in case of temporary loss of income.
Life and health insurance are two important aspects of personal finance. While some confuse them for savings instruments, some buy insurance just to save tax, others ignore it completely. Life insurance works as a replacement of your income for your family in case of your untimely demise. So, it needs to be adequate and not just a mere process to save taxes. Health insurance on the other hand pays for all health care expense pre- and post-hospitalisation. It’s a must have given the increasing healthcare expenses.
Your credit repayment history is shared by lenders and recorded by the credit bureau. So any delay in loan repayment doesn’t just increase your interest burden but also knocks down your credit score. A low credit score may affect your chances of getting a loan sanctioned in future. So prioritise paying off your loans over anything else.
Investing without goals
Saving up haphazardly is not enough to build a corpus to achieve all your aspirations and beat inflation. You need to put your money in specific financial instruments based on your goals. So start off by figuring out your short-, medium- and long-term goals. This will help you choose your investment instruments based on the investment horizon you have and the risk appetite.
Spending first and saving later
Spending first and saving later is a folly. It only leads to wasteful expenditure. Instead lock in your savings first and spend what you have left. Calculate your necessary expense and allocate money for it. The rest must be set aside at the start of the month. Ideally you should be saving 30 per cent of your monthly income every month.
No tax planning
Tax planning must be done actively through the year and not left for the last minute. Understand your tax liabilities and invest in tax-efficient investment instruments to create wealth and reduce your tax outgo. Invest in PPF and equity mutual fund to reduce your tax incidence and get better returns.
No retirement planning
It’s common among young people to procrastinate when it comes to saving up for retirement, which seems to be a distant future. However, remember you owe it to your future self so that you are comfortable in old age. Also, the earlier you start, more you accumulate. The power of compounding works on your money.
Minimum card payment
Credit card payments need to be made in full and in time to avoid high interest charges. You might be able to avoid the late payment penalties by making the minimum payment, but the interest charges will be applicable on the outstanding amount. And considering the interest rate is quite high on credit cards, this can turn out to be one of the most expensive forms of debt.
Taking loan to settle other loans
When you take a loan, it’s important to have a repayment plan in place. If your EMIs go beyond your means, you will end up taking other loans to pay off your existing loans. This will soon lead you to a debt trap. Make sure your EMIs and repayment amount stay within 30 per cent of your monthly income.
The writer is CEO, BankBazaar.