When it comes to money, people often focus more on income rather than saving and investing to fulfill financial goals. Mismanagement tends to occur when you don’t track your money and lose opportunities by not planning properly. It’s not your fault if you don’t understand investing, but not trying to learn or hiring someone to manage it on your behalf can be a significant blunder that influences your lifestyle. Here are some basic principles everyone should keep in mind when managing their money.
1. Limit Yourself to Two Savings Accounts
People often open multiple savings accounts for different purposes. However, having more than two savings accounts is unnecessary and can lead to charges and opportunity losses. Maintaining a minimum balance in multiple accounts to avoid charges can result in mismanagement and missed opportunities, as that money cannot be used elsewhere. Sometimes, people leave small amounts in various accounts and forget about them, incurring SMS charges, annual maintenance fees, ATM fees, etc. It’s wise to limit yourself to two savings accounts.
2. Track Your Expenses and Savings
Effective planning and management start with understanding and analyzing data. If you don’t track where your money is going and how much you need to save and invest to meet your financial goals, you may end up worse off. Knowing your daily expenses and anticipating future expenses helps you manage your savings and investments better. It’s crucial to forecast future expenses and allocate your money accordingly.
3. Start Saving and Investing Early
Compound interest is the magic that can multiply your money significantly over time. Money you invest generates returns, which in turn produce more returns, growing your wealth like a snowball rolling downhill. The more you invest, the larger your returns will be, leading to substantial growth. Starting investing early creates a remarkable edge over starting late.
4. Invest in Business
Having a job you love that generates a good income is great, but it may not be enough to make you wealthy. A job provides steady income and covers day-to-day expenses. However, to grow your wealth to meet future expenses seamlessly or to become significantly wealthy, you need to invest in business ventures. This could mean starting your own business, investing in someone else’s idea, or investing in equities or equity mutual funds. Business investments typically offer substantial returns compared to traditional, less risky investment products. While fixed deposits and other risk-free investments are safe, adding some risk to your portfolio can yield better returns.
5. Opt for Term Insurance Over endowment Life Insurance
In many countries, life insurance products have created misconceptions among people. Endowment plans, for example, generate a mere 6% return over time. When you opt for an endowment plan, you might pay ₹ 20,000 annually as a premium and end up with a cover of no more than ₹ 500,000. A young married person earning ₹5,00,000-₹10,00,000 per annum typically needs a ₹75 lakh to 1 crore life insurance cover to meet dependents’ needs. The only way to get such coverage is through term insurance. Opt for one term insurance policy early in life with a 30-year term, and your life insurance needs are covered. Using life insurance primarily for tax saving is a mistake.
6. Hire a Financial Advisor
Many believe they can manage their money on their own, but they might miss market opportunities. Not everyone stays updated with market trends or has extensive investment knowledge. Even if your financial advisor’s fees initially looks hefty, in the long run, their expertise can be life-changing and can create multi fold return over cost you paid for fees. Choose your financial advisor wisely, focusing on honesty and capability.
7. Avoid Speculation and Gambling
Some people seek to make big money quickly through speculation or gambling, which is highly risky and can lead to financial crises. There are no shortcuts to making a fortune overnight. It’s important to maintain discipline and avoid such activities from the beginning.
"Patience, perseverance, and timely investment create fortune."