Five signs of great financial health!!
Everyone want to be financial well-off. We all aspire for better homes, cars, vacations, etc. but are these signs of your financial health? You should not confuse owning a great car with a person’s financial health. He may have bought the car on a loan & this is not a sign of being financially free. So what is the meaning of financial health? Well, we can judge a person’s financial health with the following parameters-
Loans- the lesser, the better.
In today’s world, the mantra of the generation is ‘buy now, pay later’. You want a new car, get a loan. That new ipad is the thing to buy but no funds for it. No problem get a consumer products loan. Want to spend Friday night out in that new & expensive lounge bar, just swipe your titanium credit card! Well this is to your financial health, what eating donuts regularly is to your physical health! Loans are not bad per se but having too many debts creates havoc not only with your net worth but also to your cash-flow. This is because servicing that debt makes you save less & when the EMI’s grow too big you end up in the worst case scenario of a debt trap. You need more loans to pay off older loans. It becomes a never-ending circle.
Have more investment assets!
Your assets are of two types- personal which includes your residential home, car, family jewellery, etc. & investments assets which include your stocks, bonds, investment property, etc. Many people believe their biggest investment is their home. They feel that’s a great thing. Yes, having a fully owned residential house without any loans on it is a great thing, but it’s not an investment! You use it only for your personal purposes. There is no income accrued from it yearly nor can you book any profits from it without thinking of first purchasing another home. We are not saying that it is wrong to buy a home, what we are advising is that your investment assets should form a bigger chunk of you total assets pie. Stocks, bonds, additional investment property, etc will yield regular income as well as capital gains. In a worst case scenario you can dispose them without affecting your own lifestyle. Can you do that with your home? Thus it is advised that instead of going for bigger homes, buy a home which suits your budget & invest more of your savings in investment assets!
Savings is the key!
We have two people, Mr. A & Mr. B. Mr A is earning Rs 2,00,000/- per month & Mr. B is earning Rs 50,000/- p.m. Generally everyone will feel that Mr. A is more financially healthy, right! But on further enquiry we see that Mr. A is spending Rs 1,95,000/- p.m. as his living expenses. The bulk of these expenses are for maintaining his high standard of living. Mr. B on the other hand is spending only Rs 25,000/- p.m. Though A’s income is more his savings are much less than B. Mr. B is investing his savings well & will soon be more wealthy than A. It is not your income which determines your financial networth but your savings!
Have a financial cushion.
When you have bad back, you always want that extra cushion. Even the healthiest among us, sometimes fall ill & need that extra care. The same applies to your financial health. You may have a bad year, lose a job, have a medical emergency, etc. For these moments you need to keep some funds as contingency. Ideally you should keep three-six months expenses in a liquid avenue for such emergency. Also you should have right insurance cover for life, health or property, if the same is needed.
Secure life goals.
We have many people who have good amount of assets & feel they are financially secure. They do not realise that these assets may have to be used for their life goals like retirement, child’s education or wedding, etc. For eg. A person may have investments worth Rs 50,00,000/- & may feel he doesn’t need to do anything more, but he doesn’t realise that his retirement corpus requirement is Rs 75,00,000/- & his daughter’s wedding will cost Rs 10,00,000/-. This means he will utilize his investments fully but still fall short. What will he do then? Compare your investments with the funds required for your life goals. If there is a surplus, you are financially free!
With these points in mind, go ahead & take your own financial health check-up. If you are strong on all points, congratulations! If not, do work on the same. We at Fpguru.com are always available for any advice!
The article has been written by Jai Adiani. The writer is the founder of Fpguru.com
< Prev | Next > |
---|
Comments
u actually the doctor of finance.
thank you for enlightening us all.
THIS WILL CERTAINLY MAKE ME TO RESCHEDULE MY FINANCIAL ACTIVITIES.
RSS feed for comments to this post