4 Steps Process to Financial Strenght
These four steps to achieving a sturdy financial future:
Achieving financial freedom and strength is not easy. It takes dedication and effort. While many would like to achieve these goals, the fact is that many of us are simply not equipped with the skills to achieve these goals. Our education system does not teach the ‘practical’ aspects of managing money. Barring some gifted individuals, only those very few who have taken advanced courses in finance or economics or have acquired an MBA have the knowledge and skills to manage their finances effectively.
Essentially, managing your finances is a four step process.
This step teaches you to be wise with your money. For most of us, certain basic thumb rules can be readily applied –
- Live within your means – this means that you typically do not spend more than 1/3rd of your income on your household expenses. All your debt payments put together should not exceed 1/3rd of your income. Before you buy a thing, as yourself “is it a need or is it a want?” If it is a ‘need’ go ahead and buy, but if it a ‘want’, well you now know that you should simply walk away.
- Control your debt – credit cards are designed to make it easy to pile on debt. As a rule, you should be able to clear your credit card debt every month. Be punctual about paying off your bills. Late fees and interest can compound your debt at an unbelievable rate. See if you can consolidate your debts on one, lower rate card. Use any immediate savings to clear off as much debt as you can.
- While the going is good, create an emergency fund with about 3-6 months’ worth of living expenses to cater to unemployment or any other emergency. This money will help you stay away from credit card debt in bad times.
- Define your goals – short term, medium term and long term. How do you want your finances to be in six months? A year? 10 years from now? Clearly write down what you are willing to do to achieve those goals. Make a plan and follow it.
This step focuses on protecting what you have. It is essential to ensure this to achieve a safe and stable financial future.
When you are young, you need to protect your income and ensure that in the case of premature death or disability, your family is provided for. As you grow older, you need to plan for retirement and manage the legacy you have created. Having adequate insurance is critical. You need to cover your health, life, earning ability, any personal liability and your property. Just one major illness or hospitalization can wipe your finances out if you are not adequately covered.
Middle age is often when you can accumulate for later stages. While you are building your savings, you need to be aware of some basic concepts. These are –
- Understanding the compound interest (Rule of 72)
- Understanding how inflation affects your future
- What taxes can do to your savings
- What is risk and as to how to either minimize or eliminate
(Note – the above points have their independent write up in a separate page).
This step teaches you to protect what you have created. You must also devote some thought to your Will and succession planning so that whatever you have been able to create is used well once it is time to pass our legacy to the next generation.
To implement this step you need to pay attention to
- Your insurance needs
- Your long term care needs
- Granting power of attorney to a carefully selected person
- Writing a will
- Creating a trust or a family limited partnership for your major assets
Note – All material on this page is for general guidance purpose only. You must take the advice of a properly qualified consultant on all tax and legal matters.