Let’s face it, everyone wants to have a financially secure future. Whether you have just started working or getting ready for retirement, you would like to be prepared to take on any challenge that life throws at you.
Most of us have developed our own philosophy when it comes to personal finance. We often find ourselves emulating the habits of the people we admire and come up with a financial mantra that works for us.
That being said, adequate savings and right investments lie at the heart of countless financial success stories.
It is in this context these 5 tried-and-tested money tips become significant to someone who wants to achieve financial stability.
Tip 1. Pay your future-self first
The first tip drives home the message of savings! The general rule is that you must save a minimum of 10% of your income every month. In order to actually be able to do it, you need to set aside the funds for your savings as soon as you get your salary (preferably in a separate account), even before you start paying your bills. This ensures three things:
- You actually save some percentage of your income each month
- You learn to manage your expenses with the rest of the money
- You get into the habit of saving
Developing a habit of saving money is the first step to becoming financially secure. The general consensus is that by saving 10%, you are not overburdening yourself, and you still have a significant portion of your income left for your expenses. If you just save 10% of your income, let’s say for 20 years, there is a good chance that you could attain financial independence when you retire.
But the 10% figure is not a one-size-fits-all rule. The amount you save depends on your financial situation. If you earn more, then it is a good idea to save around 20 to 30% of your income. The same applies if you are starting to save late.
On the other hand, if you find it difficult to save at least 10% (maybe owing to piling debt or insufficient income), do not get discouraged. Save as much as you can. The whole concept behind the first rule is to get into the habit of saving on a regular basis.
Tip 2. Savings must be put to work with smart investments
You know that saving money is the smart thing to do, but have you ever heard of a piggy-bank millionaire? Just saving a certain percentage of your income might not be enough to secure your future. You need to figure out how you can grow your savings.
The second tip brings into focus the importance of growing a portion of your savings with smart investments. But before setting out on your investment path, ensure:
- Your investment choices are aligned with your short-term and long-term financial goals
- You have complete clarity on the risks and rewards involved with every investment instrument you choose
- You aim to diversify your investments (into multiple low, medium and high-risk instruments) in order to offset the combined risk quotient
While all this may appear cumbersome, it’s extremely crucial for you to ensure these things as losing your savings due to bad investment decisions is the last thing you want.
Tip 3. Invest where your heart lies
Having made the argument to show why investment is essential to attain financial security, the third tip dwells into choosing the right investment portfolio. It is not possible to accurately predict which sector or company will do well. But that’s not the focus here.
If you look at famous investors and venture capitalists, they have found success by investing in areas of their expertise. They have used their knowledge of a particular field and invested in technology that furthers their passion. This way you have an edge because you are already familiar with the ins and outs of the sector.
You can also consult financial experts, read books (like these) and articles to get credible information, build smart perspectives and make informed financial decisions. An added advantage of this tip is that it protects you from falling into traps set by scamsters.
Tip 4. Learn to segregate needs from wants
There is a subtle yet important distinction between our day-to-day needs and wants. I need groceries but I want imported coffee. While the difference is small, the impact of not understanding it could prove to be expensive.
Every time you want to purchase something, ask yourself if you need it or want it. On your path to attain financial stability, you have to learn to stick to the “need” purchases rather than “want” purchases. Unnecessary expenses will very easily eat into your savings if you are not careful.
Tip 5. Build a cash emergency fund
A sudden unexpected job loss or accident may drastically reduce your savings, or worse, leave you under debt. A simple solution is to remain financially farsighted and have in place at least 3 months of your income set aside as your cash emergency fund.
While some would argue that fixed deposits can qualify for an emergency fund, it’s better to have the fund parked in a savings account as you can quickly access it while you take on an unanticipated situation. Withdrawing an FD before maturity may take some time and will surely result in loss of earnable interest.
So, following these tried-and-tested money tips is a good way to start your journey towards financial success. Whether you want to save up for your retirement or increase your wealth, these simple tips can be an excellent foundation to build your future on.