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Know your Financial Health

Updated on March 4, 2012

Financial Stability

Health awareness in the society is increasing day by day. Almost everybody is concentrating on their health. They are changing their food habits, like having healthy fresh food instead of junk. They are also hitting the gym to stay fit. If any doubt regarding a health issue, searching the internet and know about it. Yearly health checkups, suggestions from the doctor are one of the most common things that people are following to stay fit and healthy. Yes, this is a very good thing and this change is very helpful. But, how many people think about their financial stability in the same way? My answer is very few.

In my opinion, financial stability is as important as staying healthy. Owning a house, earning and saving enough even after paying the credit card bills doesn’t give you financial stability. There might be some factors which might be affecting our finance without our knowledge and as the time passes by it might get so bad a malignant cancer. So, we need to think out of the box and try to understand the possibilities to improve our financial stability.


Economic Development

To achieve our goals and to fulfill our dreams we need to spend some time daily. First of all, we need to get an idea about our finances and the financial system. What is “Inflation”? How does it affect us? Why our financial advisors are worried about the fall in the dollar value? How are the interest rates and how it will be in coming future? What are the ways to reduce the income tax we pay? All the factors will definitely affect us directly or indirectly.

Bank rates change indistinctively through the time. It will definitely affect our deposits and our house loans interest rates. For example, let’s say we made a deposit of 100,000 USD for 5 years in a national bank with an interest rate of 8.5%. Now, after 6 months the interest rate increases and some bank’s offer 10% interest rate. The difference of 1.5% on a huge amount like $100,000 is not less. So, we might immediately shift our money to the other bank or we might change to new policy were we get more interest in the same bank. There are also a lot of changes even in the policy field. When a new policy comes up with better services and also with long term of payment and when it makes huge difference while paying the premium, then we can change the policy from one company to other. This can be done only when we have enough experience in managing the finances.

This can be achieved only if we put it into practice as we do to keep ourselves healthy and fit. Daily newspaper, articles on finances, calculator, pen and paper to practice the finances will give us good experience and we need to put in our effort so that we get good results. If the income we get through our investments is less than the inflation value, then the value of our money is going down. This is a major loss and it’s a big problem and a concern like blood deficiency in our body.

SIP (Systematic Investment Plan)

The Cholesterol Effect:

There are two types of cholesterol in our body, LDL (Low-Density Lipoprotein) and HDL(High-Density Lipoprotein). HDL is good for health and we need to keep an eye on LDL and make sure that it does not increase. In the same way, when it comes to the financial debt, we need to monitor them. There are two types of debts we take in our lives, good debts and bad debts. The debts we make to spend on world tours etc. are not same as the debts we make for investments, to buy a house or to buy a land etc. And if the market is good, the investment value increases at the rate of 15% per annum. And if the real estate sector is in boom, then our investment will be doubled. So, these are considered as good debts. The debts we take for spending on world tours etc. are considered as bad tours which relates to the LDL (Bad Cholesterol) in our body and we need to take necessary actions to avoid those kinds of debts.

The loan we take to build a house or to buy a land is not exactly considered as debt. But it is called SIP (Systematic Investment Plan). Also, the loan we take for restoration of our old house comes under same plan. If your old house is of worth $200,000 in the market and if it takes $100,000 for restoration, the best plan is to go ahead with the restoration work. This is a very good plan when the real estate sector is in boom, as your house value definitely increases by at least 3 to 4 times and thus your debt turns out to be profit.

The loan we take to buy a luxury car or to buy any luxurious furniture for our home is considered as a bad debt (LDL). The moment we bring it to our home, their value depreciates. Then we need to pay extra interest on the top of the depreciation, which is a big loss for us.

If we are paying more than 40% of our monthly income towards these kinds of debts in installments, then we need to start looking in to our finances very seriously, as these might turn back and hit us in future. It forms like a clog that forms in arteries when the LDL (Bad Cholesterol) is more, which is very dangerous.

Investment Tracking

Track your investment

When it comes to health, we keep our health reports very safe and secure. If in case of any health emergency, we immediately go to a specialist doctor who can diagnose and help us recover. But, when we are in financial crisis and need help, do we go to a financial advisor? My answer is “No”; very few people who are well prepared with their finances might go and get help. Even the last day of the premium payment for the life insurance policy should be reminded by the policy advisor. We don’t even share our investments with our wife/husband. Sometimes, we even forget that we had an investment.

This negligence should be taken care, like writing every investment in a dairy or notepad that you carry on with you.

  • Note down the life insurance policy value, advisor name, last date of the premium and the maturity date.
  • Investments on your mutual funds.
  • Bank accounts information.
  • Investments on real estates.
  • Debts that needs to be cleared.

We also need to know when a particular investment can be pulled out and what’s the purpose of a particular investment like bonds, mutual funds etc.

Everybody has goal and dreams in their life, to own a house, a car, children’s education and their marriages, foreign tours and retirement. In these there are long term goals and also short term goals as the life progress. We need to start investing according to our goals like fixed deposits, recurring deposits, PPF, child plans, pension plans, stocks, mutual funds, gold funds, real estate etc. You can divert your funds in any of these according to the situation and risk involved in them.

Controlling Ourselves

We always have the fear of putting on weight, even then, mind takes over the heart and wants to order pizza. We tend to oscillate and probably our weakness too. A slice of pizza once in a while, when we are desperate can help us to stay healthy.

Set your dreams according to your ability. Almost everybody wants to ride an expensive luxurious car, but is it really worth and how can we afford to maintain it after we buy is the main question? It depends on our ability to think and if we think properly we can there are many ways that we can fulfill our desires. For example:

  • Buying a luxurious car is an expensive effort, but if we think twice before we act on it and if we try to search for a quality vehicle with same features in used cars from dealers who also provide us with warranty.
  • Buying a brand new house might cost you around 500 K – 1000 K depends on the place and size. But, we can also think of owning a bank’s foreclosed houses which might be even cheaper.

Savings

  • Earnings and Savings Percentage: (The amount you save / the amount you earn) per month gives you Earnings and Savings Percentage. We need to save at least 20% apart from the expenses i.e. if we are earning 10,000 USD per month, then we need to save at least 2,000 USD.
  • Health Insurance: We need to take Health Insurance for all the members in the family.
  • Last but not the least, when you want you want to leave the job and set up a new business where there is no monthly income, then, the first thing we need to do is setting up a term policy. It will act like a security for your family’s welfare.

Finally in case of emergency

What if there is an emergency situation and we need money immediately. We cannot sell our stocks or our property immediately. How this situation can be resolved? Experts say that, we need to be always ready for this type of situations. We should never spend our emergency money at any cost. “Emergency is Emergency!” It might be a health emergency or a job crisis or something else. And, at that point of time, if we are short of what we need everything we did till now saving and investing will be of no use. Saving at least 3 months of salary as emergency money might really help. We can also deposit that money in ‘Sweep in Bank Account’, where it acts like fixed deposit and we also get interest on them and when it is necessary we can take it out immediately. ‘Liquid Funds’ are also one of the options.

When a guy is spending a lot money using his credit card, it is not necessary for us to be a personal financial advisor to find out that guy has no enough balance in his bank account. Do you believe in a guy who loves gambling, telling that he has no debt? Our habits define us and good habits in health perspective keep us healthy. In the same way, good financial habits keep us away from worried life.

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