Like music, finance is both an art and a science. If you learn the basic rules of finance, you begin to understand the science part better. This will give you the knowledge and confidence to manage your personal as well as professional financial life. So learn these small but critical concepts for better financial management.
This is the foundation of a healthy financial life. Savings is not what is leftover after your spending! Saving is that sum of money you have targeted to keep aside before you swipe that card or write the first cheque. You must keep a target of saving a certain sum of money every year. A simple way could be diverting a certain percentage of every fee that you get, say for example 20%, into a separate account and treat that as never received and investing that safely. It’s like you cut your own TDS! Over a period of time, you will get used to dealing with just the balance 80%.
The golden rule of finance (as of life!), if you want a higher reward i.e. returns in terms of interest, profits etc, you will face a higher risk. If a friend or business associate of yours promises you say a 20% return by investing in a certain venture whereas a bank fixed deposit pays you 7%, you must understand how much extra risk you are taking. The risk may be in the form of delayed returns to the extreme of losing the money altogether. That doesn’t mean you should avoid risk, but you should first understand the risk and then invest.
In the hustle and bustle of business and life, we are likely to lose sight of the long-term horizon – 10, 20, 30 years. Today’s problems and opportunities take precedence over something that’s going to happen in the next decade or post your retirement. That’s the reason we have to consciously keep one part of us constantly focused on this long-term horizon. Every decision you take should also be evaluated from that perspective. If you have bought a high-end luxury house or maybe a farmhouse, you need to also factor in the running expenses that you will have to incur every month over the long term.
You have a manager who handles your professional life – from helping you get work to planning your schedules. Can you imagine your life without your manager? Similarly, you need a qualified person to manage your financial life – A Financial Planner. He is a person who is loyal to you and someone who should be more worried about your money and financial growth than you are! The Financial Planner will also help build a small Money Management team around you i.e. Stock Broker, Banker, Mutual Fund Agent etc. The Financial Planner becomes your single window solution for all your money management needs.
As a professional, your work can be done only by you. That means if for whatever reason you cannot work for some time or when you stop working your income completely stops. This is called Active Income. To balance this, you need to start creating sources of Passive Income. Fixed Deposits in Bank, Mutual Funds, Rental income etc. are all instances where your money is growing without you working.
These ‘boring’ investments are crucial especially for young people who are just starting off their careers. Each of these serves a purpose and all put together they create a solid foundation for your finances. They are also your nest egg in case of contingencies. Each of these deposits has some unique features. But what’s common to all of them is that they give assured returns, lock in your money and give you a peaceful night’s sleep.
Last but – as the cliché goes – not the least is the fact that one can start planning at any stage in life. In fact, let me contradict myself by saying that in the early chaotic years of your profession, you actually need to take it a day a time and take quick decisions. However, at the earliest possible, you must start with financial planning and then stick to it. A good financial planner will help you build on what you have achieved at that stage in life and make you get the best for the future.
So with these 7 sur firmly in your mind now, you can start your riyaz and listen to the sweet jingling sounds that money makes!
The author, Vinit Vyankatesh Deo is a Chartered Accountant and CMD of Posiview Consulting Partners Pvt Ltd. He can be reached at firstname.lastname@example.org and at https://www.facebook.com/vinit.deo.9