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Top 7 Rules Of Money To Stay Financially Fit

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Finances are indisputably a huge part of our lives, and just as we give attention to our physical and mental health, we must also pay attention to our financial health. Let’s take a deep dive into the seven habits of financially fit people. Follow these and you can start getting into shape yourself!

Rule 1: Spend Less Than You Earn

Living below your means, that’s the golden rule of personal finance. It sounds simple and quite obvious, yes, but you’d be surprised how difficult it can be to follow this rule. People with modest incomes find it hard to break the cycle of living paycheck to paycheck, often because some expense or the other pops up unexpectedly and they are constantly faced with rising costs of living. But the problem of overspending isn’t limited to them. Even those with higher incomes can struggle with overspending because of lifestyle inflation and impulsive spending. These days we are constantly bombarded with ads. 

We’ve got the world at our fingertips, and in just a few clicks we can buy what we want to instantly satisfy our urges. The ease of transaction has also definitely played a role in increasing consumerism. You might be thinking a dress here and a pizza there won’t hurt, after all, you’re allowed to treat yourself once in a while. And you’re right. You should treat yourself, but the problem is that small purchases aren’t very noticeable initially. It is only a matter of time before these seemingly insignificant expenses add up and start to impact your overall financial health. This needs to be controlled.

What does living below the means achieve? Well first, it keeps you out of the vicious jaws of debt. Second, the money unspent can be saved and invested for the future. But how do you break out of this cycle of overspending? Well, you make a budget. A budget outlines how you’ll manage your expenses in a given month. Start by categorising your expenses into two categories – essential expenses and non-essential expenses. 

Your essential expenses are your needs, the things you can’t do without like food and electricity. Non-essential expenses on the other hand are your wants, that is, those things that bring you joy but are not necessary for your daily life, like streaming services or food ordering. Your goal is to identify the expenses that can be cut from the ‘wants’ section. These cutbacks can significantly improve your financial health by freeing up money for savings and investing. 

Again it sounds easy, but what’s hard is following the budget. It takes a lot of discipline and self-control to resist our urge to splurge. You won’t develop this habit overnight, but slowly you’ll start to prioritise savings and become more mindful of your spending. A popular rule for making a budget is the 50 – 30 – 20 rule. According to this rule, you should spend 50% of your income on essential expenses, 30% on non-essential expenses, and save 20%. Remember to be realistic when creating your budget. If you make too many cuts from the non-essential expenses, you might lose the balance and enjoyment in your life. A realistic budget is much easier to stick to.

Rule 2: Build an Emergency Fund

Financially fit people are always prepared for emergencies. When they are hit with unexpected expenses, they simply dive into their emergency savings and emerge unscathed. They are always ready to tackle whatever financial challenges life may throw their way. But what is an emergency fund you ask? An emergency fund is a reserve of cash that you set aside to specifically cover unexpected expenses, like a big doctor’s bill or some unforeseen situations, like losing a job. It helps you out in mainly three ways:

  1. It prevents you from taking debt. If you want money quickly the debt will likely also come with high interest rates. And once someone falls into debt, it can be quite hard to climb back out quickly.
  2. It stops you from prematurely liquidating your assets. The big problem with selling assets quickly is that you are unlikely to find a fair price for them. Generally, those who sell in emergency situations have to take a loss or pay a penalty. Not ideal. An emergency fund lets you keep your assets. In fact, if you have an ongoing investment like an SIP, an emergency fund will allow you to continue it without a problem and you won’t have to pause your progress towards your financial goals.
  3. It helps you maintain your lifestyle. With an emergency fund, you can continue life without any major disruptions, maintain financial stability, and enjoy peace of mind. For example, losing a job unexpectedly is a huge financial challenge. An emergency fund can allow you to meet your essential expenses like rent and bills without much problem. It will also make the job search easier on the mind, and give you a sense of financial security and control during this period of uncertainty.

The importance of having the safety of this financial cushion cannot be overstated. Experts suggest having at least six months’ worth of living expenses in your emergency fund in an easily accessible account. You can’t park this money in stocks or equity mutual funds. Look for high liquidity options that have no withdrawal penalties. That way you can quickly access the funds in case of an emergency. 

Rule 3: Pay Yourself First

You’ve got to pay for your future self first. Let’s understand what this means. Earlier, people thought of savings as the money that is left over after spending, that is, savings = income – expenses. But that line of thinking has changed, especially among financially fit people. Now, savings are considered a priority. The first thing they do after receiving the paycheck is save or invest. A popular and effective way of prioritising savings is by automating the task. You can set up automatic transfers from your salary account to your savings account, but what’s more effective is making it a part of your SIP. 

A Systematic Investment Plan or a SIP allows you to contribute fixed amounts regularly into a mutual fund of your choice. This contribution gets automatically deducted from your linked bank account and gets invested. SIPs also have many, many other advantages, but as far as paying yourself first goes, they are a proactive approach to wealth-building. 

Slowly, your contributions will grow exponentially thanks to compound interest, and you’ll get to enjoy the many benefits of mutual fund investment SIPs such as diversification, rupee cost averaging, and professional management on top. This process will also develop discipline and patience, the core qualities of financially fit people.

Rule 4: Invest Wisely

Investing is how you realise your financial dreams, so making wise investment decisions is crucial. Here are some things financially fit people can teach us about investing:

  • Investing isn’t about putting money where your friends and family put it. You have to assess your financial situation, your goals, investment horizon, and risk tolerance. Only then can you make a personalised strategy.
  • Risk tolerance isn’t just about how much risk you are comfortable with. Assessment of risk should also consider your age, income, and overall financial situation. For example, a young investor can afford to take more risk than an older investor because they have the time to bounce back from short-term market fluctuations.
  • Get started as soon as you can. Compound interest works best in the long term, so even if you are hard pressed for cash, you can invest in affordable options like SIPs and begin your investing journey. Increase your investment period as much as you can.
  • Diversification is a vital risk mitigation strategy. Don’t put all your eggs in one basket and invest in a variety of assets and funds across different industries. This way, you can minimise the impact of poor performance in a single asset class or sector.
  • Take inflation and taxes into account. Both can put a real dent in your overall returns, so it’s important to factor them into your investment strategy.
  • Doing tax planning before you start investing can be very efficient. You’d want to save taxes in the future anyway, so it’s better to stay on top of it right from the beginning. 
  • Don’t borrow money to invest in the market. The rewards for doing so are not nearly as proportional as the risks involved.
  • Monitor your progress regularly. Investing isn’t a one-and-done thing. It is an ongoing process that requires action in case your financial situation or the market conditions change.
  • Understand the fees and penalties associated with your investments. They can also affect your overall returns.
  • Do not get carried away by emotions while investing. Many retail investors let their emotions dictate their investment decisions, which can lead to impulsive moves and poor results. 
  • There is a wide variety of investment products available in the market. Sifting through them to find the ones that match your profile can be quite tough. That’s why you should always take advice from a financial planner before making any final decision. 

Rule 5: Manage Debt Responsibly

Getting out from under the heavy burden of debt can be very challenging. Individuals with debt should prioritise paying it off as soon as possible. There are different debt repayment strategies one can employ, such as the snowball method, where you pay the minimum monthly amount on all your debts, and then start paying them all off starting with the smallest first. It’s called the snowball method because, like a snowball rolling down the hill, it slowly gains momentum and size and gives you the motivation you need to tackle larger debts. 

Another repayment method is the avalanche method, where again you start by paying the minimum monthly amount on all your debts, but then prioritise the debt with the higher interest rate. This method saves more interest money in the long run. Whichever method you use, remember that once you’re free of debt try to stay out of it. It’s very easy to take high-interest debt but it can spiral out of hand pretty fast.

But not all debt is bad. That’s right! Used properly, debt can be a great financial tool. For example, when you take an education loan, you are investing in yourself, and your ability to earn more in the future. Similarly, a home loan can save you money in the long run, and it also allows you to buy a valuable asset that can appreciate over time and provide long-term financial stability. 

That’s not all. Even credit cards, if used wisely can be beneficial as they can improve your credit score. People with good credit scores get loans more easily, have increased credit limits, and get lower interest rates. Keep an eye on your credit score and improve it slowly by:

  • Repaying all your debts on time.
  • Not having a lot of debt or EMIs active at the same time.
  • Lowering your credit utilisation ratio. This ratio tells you about the amount of credit you’re currently using compared to the total amount of credit that you are allowed to use. 

A financially fit individual has a healthy credit score. Always check for discrepancies in your credit report and alert your bank as soon as possible to avoid getting a poor credit score.

Also Read: Taking Control of Your Finances with Debt Consolidation Loans

Rule 6: Protect Your Assets

Insurance and financial fitness are inseparable. You can protect yourself, your family, and your assets through insurance. While the emergency fund is your financial safety net, insurance can be your financial shield. Hospital costs are rising at a scary pace in India, and that trend is only expected to continue. In case of a serious injury or illness, the emergency savings might not be enough to cover the hospital costs. That’s why having a health insurance policy in place is important. Having life insurance is also vital, as it covers the financial vulnerabilities of your family in case of any unfortunate event. It helps them maintain their current standard of living and prevents them from taking debt. You can also explore different types of life insurance policies, such as Guaranteed returns Insurance Plans (GRIPs) and Unit Linked Investment Plans (ULIPs) that combine insurance and investing. 

Being insured not only offers peace of mind but also tax benefits. Under Section 80D of the Income Tax act, one can get tax deductions on health insurance premiums. While Section 80C offers tax benefits of up to Rs. 1.5 lakh for investing in ULIPs.

Rule 7: Continuously Educate Yourself

Knowledge pays the best interest. The world of finance may seem complex at first, but a little effort every day can go a long way in expanding your financial knowledge and understanding of how things work. Read articles about personal finance, listen to a financial news podcast, or maybe watch a video on investing. The more you know, the fitter you will become financially. Once you start to get a hang of things, start surrounding yourself with people who are fluent in finance. 

More knowledge will lead to informed decision-making, and you will feel more secure in your financial future.

Conclusion: Achieving Financial Fitness

There we have it! Seven golden rules that can set you on the path to long-term financial well-being. Developing financial fitness is not much different from developing physical fitness. When you go to the gym, you don’t grow a muscular physique in a week. It takes years and years of discipline and patience to see the results. Discipline and patience are the keys to financial fitness as well. 

When you invest, you won’t get rich overnight. It will take years of disciplined saving and investing, and the patience to stay invested for the long term to achieve the results. And just like one may lose the motivation to go to the gym after a few months, one may lose the motivation to follow their budget or invest regularly. Remember that when motivation fades, it’s the discipline that keeps us going. Its importance to financial fitness thus cannot be overstated. 

Having a plan can make things much easier, so don’t hesitate to consult with a financial planner. A financial planner can be like your gym trainer. Just as a gym trainer can make diet plans, set fitness goals, and create workout plans according to your body, a financial planner can help you set financial goals, create a budget, and make a personalised financial plan that includes investment strategies, retirement planning, tax planning, insurance coverage, and more.

Take the first step towards financial fitness today!