SMART MONEY | DEVELOP THESE BEST FINANCIAL HABITS

We are in the new financial year, and if you haven't set any financial resolutions, this is a time to consider them and also evaluate the progress made by your existing resolutions. Unlike New Year's resolutions, which start to lose novelty within a few weeks, make sure that you follow your financial goals with a process that can help you realise them. Financial goals need planning to succeed. We often fail to achieve them because we do not work towards setting a framework to achieve them. It is just like setting a habit to brush your teeth, take a shower and so on.

In December 2022, Tejasvi Surya, Member of Parliament, raised the issue of personal finance management in Parliament. "Personal financial management is a crucial life skill that young Indians must be taught as they enter the job market. It will help them navigate financial life effectively and prevent falling prey to dubious schemes, debt traps," he said. One could say that many of us make poor financial decisions because we weren't taught money management in school. But one look around and you can be certain that even many among those with qualifications in finance are likely to have made mistakes or taken poor financial decisions.

Personal finance goals can be achieved by making a change in our day-to-day living for it to become a way of life. It is like developing a routine and a process so that it becomes second nature. Think of it like preparing a meal—you need the ingredients, you need to know the cooking process and the time you will need from preparation to serving. Financial goals are similar—set a goal with a timeframe and then based on your affordability and comfort, work on achieving it with regular savings and investments.

In its simplest form, personal finance is every­thing in your life that inv­ol­ves money. It is about spe­nding, saving and investing money to live comfortably, have financial security and achieve goals in life that need money. Your financial goals are unique to you and it is important to form good financial habits that help you reach there. In his book, The Power of Habit, author Charles Duhigg says, "If there is a bad habit you want to break, think of it as a long-term plan instead of a New Year's resolution."

Change, he believes, ought to be incremental, without an arbitrary time limit. Look around you for artists, sportsmen or anyone who has excelled in their field and you will find that it all boiled down to good habit formation. Your financial health and potential for building wealth are dependent on your habits. Short of winning the lottery or receiving a massive inheritance, the best financial habits involve little decisions that you make every day, every week, every month and every year.

Developing these habits all at once is tough. For the uninitiated, there is a steep learning curve. Moreover, not all strategies are equally effective at every age. The best approach is to gradually master your financial habits and build them at every stage of your life. In this feature, we will explore financial habits that can see you through your lifetime so that you can leave those New Year resolutions be.

Habit 1: Live within your means

This is the foundation of a good financial habit. There is nothing complicated about this. By following it, you will automatically start to save money. You should learn early to save money. At a young age, it is understandable that one is tempted to overspend, but saving a portion of your earnings will always be beneficial. If you earn, say, Rs 50,000 a month, live with Rs 35,000 and bank the rest. As your savings and investments grow, your financial situation will improve dramatically.

An extension of this habit is to track your spending. Make it a point to write down how much you spend and on what. There are several mobile applications that help you automatically track spending, so you will know how much you are spending across categories. Track expenses under heads such as household, rent, groceries and others, which will provide the budgeting skills necessary to last a lifetime.

Habit 2: Setting financial goals

Goal-setting has proven benefits in our financial lives as it provides direction and meaning to our savings and investing efforts. The habit makes it easy for you to make sacrifices or stick to a budget because you know what outcome you are striving for. Goals can be both for the short and the long term and it helps if you put them down under these two heads to make appropriate decisions.

Setting financial goals helps you stay disciplined in your investment process (see Financial Goals...). The habit of being accountable to your goals provides the inspiration to keep you working towards them. For instance, the goal of funds for your children's education is something that you rarely touch for other uses. Moreover, if you develop the habit of regularly reviewing your goals, it will help keep you on track. Importantly, when you reach your financial goals, you get a sense of accomplishment. The habit of setting financial goals and executing them will help you in all your other financial efforts.

Habit 3: Contributing to retirement savings

Start a retirement savings plan as soon as you start earning. Most salaried people are exposed to mandatory retirement savings through their employer in the form of provident fund or the NPS (National Pension System). But there are also numerous other retirement savings options available that can also provide a form of income tax deferral. These are essential to building a healthy nest egg for retirement.

It is better to start contributing a little bit now than to wait until you can contribute a lot. For instance, over a 30-year span (which is the number of years one normally is employed before retiring), an average Rs 15,000 a month for 360 months earning 10 per cent returns works out to Rs 3.39 crore when one retires. Make it a habit to set up retirement savings and start funding it with your money for a financially secure retirement.

Habit 4: Checking your credit history and credit score

You may not be aware of the importance of your credit score, but that is how lenders evaluate your creditworthiness. Your credit history and credit scores are vital pieces of information that are important to your overall financial wellbeing. You can avail your credit report for free, though you may have to pay for it if you seek it beyond a few times. Viewing your credit history as shown in your credit reports and your credit score will help you understand your current credit position.

A credit score is a three-digit number designed to represent your credit risk, which is of importance to a lender. For a lender, your credit score is an indicator of whether you can repay the loan or not. And, your credit history is the record of how you have managed your credit accounts. Your credit history includes your current and past credit accounts, information about your loan repayment history and how much you owe lenders. Your credit score is arrived at based on these details and it helps to stay updated on any changes in the score.

Make it a habit to check your credit score regularly, so that you have control over your credit and your financial life. A low credit score is a cause of concern, but it's also an opportunity to rebuild your credit score in time. Likewise, a rise in credit score can tell you what actions have helped your scores go up for future reference. You will need your credit score to be good when you plan to borrow for, say, a house or a car. A high score allows you to negotiate a favourable interest rate and also gives confidence to the lender about your repaying capability.

Habit 5: Don't buy what you can't afford

Credit is an amazing thing when you are buying something big, like a house or a car. Very few people have several lakhs of rupees to buy a home with their savings. So, for these kind of purchases, borrowing makes immense sense. Adopting good financial habits means avoiding schemes that stretch your pay cheque. Any stretch on your pay cheque has an impact on your other financial plans and habits. Credit cards are probably the most common way of stretching your finances, followed by personal loans for that instant gratification.

Develop the habit of using credit prudently. Use cards that will enhance the purchase value, for instance co-branded and loyalty cards with cashback options make purchase through such cards value for money. Remember to borrow only as much as you can return. It is easy to lose control while using easy credit, only to realise later the high cost of servicing such loans. If you are servicing a loan, make sure you develop the habit to repay the loan in time and service the repayment in full.

Habit 6: Have a comprehensive emergency fund

There is a lot that we can learn from nature. When it comes to tricking yourself into saving more money, think like a squirrel. Squirrels bury nuts to prepare for winter; we, too, can squirrel away money in order to prepare for financial dry spells. Take the habit of saving for financial emergencies from squirrels—they crucially don't store all their bounty in one place. Inculcate the habit of having an emergency fund in your 20s and by the time you are in your 30s, make it comprehensive.

It should be big enough to cover several months of expenses in case you lose your job or face some other catastrophe. Make a habit of minimising the risk of keeping all your savings in one place, and maximising the rewards of building several different accounts. It's like hiding your savings from yourself so that you are less likely to dip into them.

Do not forget to review and replenish the emergency fund, in case of a change in your financial situation. It is not about having an emergency fund to cover 3 to 6 months of your living expenses; it is about having a comfortable enough cushion in case of unexpected financial events.

Habit 7: Risk management and mitigation

You cannot predict too many things with certainty when it comes to finances, but you can be sure that there will always be one thing—risk. Risk lurks behind every decision you make about how, when and where to invest your money, making even financial wizards second-guessing their decisions or running through the numbers one more time. Develop the habit of identifying and knowing about risk, but instead of being fearful of it, learn how to control and mitigate it. (see Understanding Risks).

In personal finance, risk management is about helping you make the best decision, limit the amount of emotion in the decision-making process, and helping identify how much risk you are willing to accept given the potential gains.

Understand and appreciate the value of insurance and take advantage of it for your financial interests. Do not take insurance for random reasons or to save tax, do it to ensure peace of mind for your family. Life insurance is not about saving/ investing money or saving on taxes, it is a financial back-up. Adequate life insurance can help you achieve financial goals by taking a holistic view of financial situations as you move through life. There are random personal risks you are exposed to every day, such as becoming disabled, a prolonged illness, dying prematurely, or even outliving your resources. These can result in financial hardship without appropriate cover. Make a habit of reviewing your life and health insurance needs regularly as the risks keep changing with age and life stages.

Habit 8: Invest regularly

Investing is about placing your money in something that can earn you money over time, thus growing your wealth. But it can be a difficult task, so it is important to develop good investing habits that can help build wealth in the long run and realise your financial goals.

In today's world, it is not enough to just save. Inflation brings down the value of our savings and to maintain it, one has to invest and earn returns that are higher than the cost of inflation. Even idle money in a locker or bank account is an opportunity lost because this money has the potential to earn more income when it is invested in other assets.

Think about investments as a necessary mon­thly expense for the sake of your future. The best way to be consistent in investing is through a Systematic Investment Plan (SIP) in a mutual fund. Here, you can easily park a fixed sum consistently regardless of the market conditions. In fact, an SIP helps you follow the discipline of investing every month.

Habit 9: Pay bills on time

Late fees are expensive and lead to financial indiscipline. You can avoid delaying payments by setting up a regular schedule for paying bills. Check out your bank's automated bill-pay service. This way, you will never forget a payment and also ensure you do not delay it and pay a fine.

The habit of paying bills on time will also improve your credit rating and credit score, which goes a long way in ensuring you are not charged a higher interest rate on a loan when you need it. If you wish to manually make payments, budget it and also set reminders. To make sure you are not late owing to holidays, make payments a few days before the due dates.

Habit 10: Reviewing and rebalancing portfolio

To invest regularly is a good habit to build wealth. An extension of this is diversifying your investment portfolio to a wide range of assets and also rebalancing it to maintain an ideal mix of stocks, bonds and other assets. Depending on your financial goal and your life stage, you can rebalance the portfolio as often as you want.

One of the biggest perils of not rebalancing is to potentially expose yourself to greater levels of risk than you had initially planned for or are comfortable with. Exposing yourself to too much risk can also lead to undisciplined investing. That's because emotions (greed and fear) can interfere with your decisions and can easily derail future goals. For instance, at the start of the Covid-19 pandemic, many investors dumped stocks because they couldn't bear the thought of losing more money and in turn missed out on future upswings.

Develop the habit of periodic review of your asset allocations to stick to your investment objectives while maintaining your desired tolerance for risk. Get into the habit of routinely reviewing your portfolio to know how it has fared and if you need to rebalance it.

Habit 11: Learn to say no

It is an important habit to know when to say no and to say so often. It is about getting control over impulse buying. Say, you are out somewhere, and you see something you like, and you buy it because it doesn't cost that much. Even worse is the ability to purchase things online nowadays and have it delivered to your doorstep in just a few days. If you do that several times a week, the spending really adds up.

The habit of buying things on impulse may make you feel good, but it will cost you. An average Rs 200 per impulse can shoot up to Rs 2,000 if done 10 times in a month. And, that Rs 2,000 could have gone into savings and investments to help you with a goal you have listed for yourself or to service a debt. This bad habit can get worse, especially when you have children and feel upset about saying no to their demands.

Telling no to kids is important for they then learn to value money from a young age. Moreover, kids always want something and at a younger age do not understand the value of money or the consequences of getting everything they ask for. On your part, you may think their wants cost less, but it takes little time for their demands to go up and it can dent the savings committed towards your child's future expenses. Develop the habit of incentivising children's demands with tasks that they need to accomplish so that they value and also earn what they wish for.

Saying no is not to deprive you of the essentials; the important thing is to have a check on your impulses. How you spend money can also inculcate the habit of saving in children and teach them about handling money when they grow up.

Habit 12: Fees matter

It's a good habit to put your money into savings, investments and insurance. But, do you know where exactly it is going and how much it is costing you? For example, say, you invest Rs 20,000 earning 10 per cent per year and pay 2 per cent on this investment as fee, you actually get a net return of 8 per cent. Now, if inflation prevails at 7 per cent, you barely manage to retain the value of your investment.

Develop the habit of having a clear picture of what is happening with your money. Tracking your spending can help you quickly identify problem areas you can improve on. Likewise, develop the habit of knowing the fees you pay for financial products and services such as insurance, investment, loans and financial planning services. A difference of even 1 per cent charge on the fee could be the difference between you achieving your financial goal or missing out.

Habit 13: Learn a new money skill

Learning is a lifelong endeavour and it is a must-have habit to improve yourself. One lesson that must stay with everyone is the need to continually pick up new skills, develop existing ones, and tweak your habits to get the best possible results. Instead of taking umbrage and saying that you don't understand finances, learn about personal finance because it is unique to you and something that can help you manage your financial life.

There are many online and offline resources to learn about money skills. Likewise, take advantage of the knowledge and wisdom of experts and people who have lived a financially succ­essful life. Make it a habit to understand new financial instruments, their benefits and how they could be of use to you. More importantly, when dealing with financial intermediaries (banks and wealth managers), ask them questions that can help you understand what they are suggesting to you. The habit of questioning what you know will be useful when dealing with your hard-earned money.

Habit 14: Savour what you have

Sometimes, it is a good habit to sit back and appreciate what you have. Years of working hard in forming habits that have enabled you to acquire financial assets is something to savour. The lesson is also in being happy with what you have than trying to acquire more things to be happy. Some people trade their old car every few years to meet peer pressure and to match up to their jobs and professions. If you want to be financially stable, you need to stick to the first habit on this list (#live within your means).

If you have more money than you need, look for ways to make an impact on others' lives. Give to charity or fund causes that are close to you. Likewise, splurge when you feel it is worth it and when the occasion calls for it. With age and time, you learn the difference between healthy splurging and reckless spending. For instance, you may wish to splurge on a momentous milestone in your life such as a silver wedding anniversary or a career jump that you had been waiting for. Make it a habit to pamper yourself every once in a while, especially when you know that doing so will not derail your financial goals and commitments.

The good thing for you is that you have already embarked on the journey to adopt better money habits by finding out how you can start. New habits in any form can be intimidating at times, but with these small changes, you can work toward big results. You may even enjoy some of the new habits you develop along the way. The truth is, you are not going to be perfect all the time in adapting to these habits. So, expect mistakes to occur, but work towards minimising them.

Importantly, be kind to yourself when you do slip up or make impulse purchases. The idea is to recognise the bad habits and work towards eliminating them. Moreover, how old you are and how long you have had bad money habits will be a factor in how hard it will be for you to break them and build better ones.

This list of 14 financial habits will help you become financially stable and not go broke. You may not be able to stay with all of them; some of you may not even need to, as you are already following some of the good habits. Remember: as you build good money habits, you will quickly see how your bank account is growing and how it is leading you to financial success. Whatever your state, pick a few of these habits and watch your finances get better.

2023-04-21T12:28:40Z dg43tfdfdgfd