A lot of importance is always given to earning of income and less importance to spending and savings. Long-term wealth creation and maintaining standard of living should be given priority. Certain basic principles and rules if followed meticulously, the probability of facing financial difficulties reduces a lot.
Based on my experience of two decades and continuous learnings from financial experts, I am listing a few financial lessons that I have followed and recommend.
Creating an emergency fund: I would compare an emergency fund to a life jacket or a spare tyre. One does not know when it will be needed. Emergency fund is generally used for hospitalisation, sudden repairs, short-term unemployment, and various other necessities. In the absence of an emergency fund, one has to rely on credit cards or loans bearing high interest rates. Generally, six-month expenditure is recommended to be kept as an emergency fund.
Life and health insurance awareness: Every individual should evaluate his/her health and life insurance requirement by consulting a reputed advisor with good experience in this field. Stay away from the advice of relationship managers of their respective banks. I have experienced and seen that these relationship managers loyalty is only towards their bank and not their clients. They always use clients and lure them to invest in products for which they have targets. I consider health insurance as a mandatory product.
Invest in companies with a strong background: I strongly recommend investing in companies with a strong background, good brand value, and good reserves. Only focusing on returns on capital and not focusing on return of capital is dangerous. Any investment option has three dimensions – liquidity, safety, and returns. Unfortunately, majority focus only on returns and not on the other two aspects.
Generation of guaranteed passive income: As has been seen over the past two decades the interest rates have seen a downward trend. Rate of interest has reduced from 15% to 6%. With this reduction in interest rate, it becomes important to have certain investments that would give guaranteed, lifelong returns of approximately 6 %. Having a regular cash flow during retirement is important than only owning assets and having a meagre cash flow. This passive income generation requires precise planning, which needs to be started at a young age. After retirement the regular income stops. Inflation increases your expenses, hence it is important to save for your retirement period during your earning phase.
There is a popular quote that describes the importance of immediate action for best results -- Do it now, sometimes later becomes never.
Any rectification needed has to be done immediately and any beginning you feel will help your financial plan has to be acted upon at once. Wishing a healthy and wealthy financial year.
(Bhushan Limaye is a Chartered Accountant)
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