Financial literacy – I

 

You enjoy the financial health outcome based on your financial behavior and financial literacy. Many times we have financial knowledge but there is an always going to be a gap if we are not going to behave according to our knowledge. Financial health is a result of sound decisions, planning, financial emotion, greed, abilities to handle both good and bad outcome, constant learning.

There is an element of ethics in personal responsibility. Your own ability to handle financial shocks from a setback. Your own ability to take a calculated risk. Planning for everything is not possible but setting the right priorities and setting the goals accordingly is more important.

• Spend less than you make/earn.

Everyone want to buy all the luxurious things but not everyone can afford them all. Hence knowing our capacity first before we start spending the money is important. Wisely spending the money based on the priority and the need is a key to spending the money. Hence it becomes the foundation of financial health. Just forget about coming out of financial debt, if your expenses exceed the income and eat up everything you have.

• Save reasonably good for your emergency fund.

Having really decent emergency fund is another important factor of finances.  But a definition of so-called decent varies according to your situation. Having 6-9 months of funds saved for living expenses which are set aside is a great idea. Saving money is most important and critical part of your life and developing the habit of saving more earlier in the life will pay you big later on.

• Pay your debt and bills on time.

Not paying the loan installment, utility bills can further dent your savings. Not paying the credit bill on time can in occur various fees and can increase the interest rate on the debt.

• Staying on track of your goals for retirement.

Many people have a plan but staying on track for your retirement savings plan is more important than anything. Setting aside money regularly based on your current circumstances and type of retirement life you want to live. All these can start when you start earning in your twenties and earlier you can start is better.

• Avoid very high-interest debt/loan.

Good money management habits will get you lower interest rate when you need it for your car loans, home loans etc. Not managing the money right can create an extra burden on you in the form of higher than the normal interest rate on your future loans.

• Keep your debt in control to keep you sustainable.

Keeping your home loan mortgage payment not more than 28% of your before-tax income and all the debt payments including the home loans installments should not increase more than 36%  of your income is advisable. Another benchmark is the 50/30/20 rule of a budget. Which says to keep your required payments of home loan and other must have expenditure (food, utilities, insurance, kids care etc) under 50%  of your after tax income. Then you’re left with 30% for your other wants and remaining 20 % for other debt repayment and savings. When you start experiencing that when your debt keeps you up in the night is the time you need to have serious re-look at your finance management.

• Keep your good debt in good condition

Your home loans and student loans are one of the good debts. Home loan provides shelter to your family and at the same time value of your home increases. Similarly, student loan, help you get a good education and good education help you earn good money later on. Pay both the loans on time.