Now don’t expect me to start off with or relate to Steven Covey’s “The 7 habits of highly effective people”. I am talking of 5 habits and not 7; and I am talking of healthy “financial” habits that every individual should follow in order to improve his financial efficiency.
Since these habits are healthy financial habits, they should be a part of your regular activities. You can make them your new year’s resolutions if you do not follow them already!
Let us go through the 5 healthy financial habits
1. Habit 1- Self Analysis of Financial Requirements:
Though most people say or believe that they know themselves very well, self analysis is actually a very difficult task. Analyzing yourself financially is also a very difficult task. However it is not impossible and there are ways and means to do it also.
You need to know your dreams and goals and what you would like to achieve within a particular span of time. Then realistically analyze your needs and requirements along with your current income and lifestyle and check the feasibility option.
Once the above is done in a very methodical and calculative manner, you will be able to understand your own financial requirements with a timeframe attached to it.
As mentioned, it is not an impossible task but yes, a very tedious and time taking one.
Why is it important?
Well, it is extremely important to do self analysis of financial requirements before you can start your investments and savings, so that you are aware of how much money you should save and invest vis-à-vis your dreams and aspirations in a practical way!
2. Habit 2- Save and then spend and not the other way round:
Most of us spend a part of the income and then end up saving the rest, if any. However the “healthy” financial habit is to go the other way round.
Like Warren Buffet has mentioned, you should save a part of your income before you start spending. Incidentally most financially inefficient people end up spending most of the income and then saving a part of it, if anything is left after spending.
Why is it important?
Now, if Habit 1 of doing Self Analysis of Financial Requirements has been done in a very sincere and efficient manner, then it becomes easier and more convincing to save up in the present for a rainy day in the future.
However, you should be mentally prepared to save a certain part of your income and only then your expenditure will remain in control. This is also very important as it helps you to achieve your dreams and goals in the future instead of spending it all up immediately.
3. Habit 3- Invest on a monthly basis:
Most of the time, we end up investing only when we need to invest for tax saving purpose and not otherwise. Thus investment becomes a burden at the point of time when it has to be done and cannot be postponed even if there is a financial crunch. Now, that seems like a real real burden if it has to be done at one shot.
Hence the more efficient way of investing is to do so on a monthly basis rather than in a lump sum.
Why is it important?
There are many advantages that can be reaped if investment is done on a monthly basis:
It doesn’t pinch the pocket very heavily as the burden of investment is distributed evenly throughout the year.
You account for it as soon as your salary gets credited and set it aside so that it is not spent. Hence it becomes like “forced savings”
You get the advantage of Rupee Cost Averaging if you invest in the open market so that you get an approximately stable return irrespective of the market performance.
4. Habit
Tax saving investment should not be solely for tax saving purpose but for investment purpose after analyzing the financial requirements.
Most of us do Tax Saving Investing of 80C for the sole purpose of tax saving and not for investment. The purpose of getting the 80C rebate becomes more important than the returns of investment or the need of investment.
Hence you need to break free from this mind frame and start investing from an investor’s point of view.
Why is it important?
The importance of doing so lies in the secret of investing sensibly. Once the mentality of “investing for the purpose of investment and not for saving tax alone” is diligently followed, 80C investments will automatically be taken care of as there are loads and loads of investment tools that fall under the category of 80C rebate like Life Insurance, Equity Linked Saving Scheme, Fixed Deposits for 5 years or more, Public Provident Fund, etc.
5. Habit 5- Portfolio Analysis and re-check:
The most important habit is to do Portfolio Analysis on a regular basis so as to check that the investment that you are doing is in line with your financial requirements or not and also to redo your financial analysis regularly with changing requirements and lifestyle.
Why is it important?
Since the time you have penned your dreams and goals against a specific time frame and have started to work towards the same, you also need to ensure that you are doing the right kind of investment so as to achieve your dreams and not keep them as ‘dreams’ forever! However, you should not check your portfolio everyday to understand what the present market value is, as most of the investment would usually be for a longer timeframe and may not give a very positive return when analyzed for a short period of time!
Thus, if you can follow all 5 Healthy Financial Habits, you would be in perfect control of your dreams and aspirations and will also have a path chalked out to achieve the same.
Now, if you have any queries regarding the 5 habits, you can ask me and I will be able to guide you through it as I have started following them myself!
