The 8 Best Habits for Financial Planning and Investment
Man is a creature of habits. It does not differentiate between good or bad habits, but like everything necessary in life, habits compound. So it is in your interest to learn the best habits in everything, including financial planning and investments. This article will look at some best habits for financial planning and investments that you can inculcate to succeed in achieving your financial goals.
Habit 1: Save and invest first and spend the remaining income rather than the other way round
When it comes to the way we use our income, most of us follow the traditional approach. During the entire month, we spend money on our regular expenses. Whatever is left at the end of the month, we save and invest that amount. So the traditional equation that most people follow is:
Income – Expenses = Savings and Investments
While there is nothing wrong with this approach, it works only for people who are disciplined enough to save a certain percentage of their monthly income and redirect it towards investments. But, a lot of people are either impulsive spenders or have no control over their monthly expenses. The result of such behaviour is that there is either nothing left or very little money left at the end of the month for savings and investments. Achieving financial goals is only a distant dream in such a situation. Hence we need to flip the equation on its head.
The equation that we should follow is:
Income – Savings and Investments = Expenses
We should make sure we make all our investments within one week of getting our monthly income, whether salary or business income. So, we should choose our systematic investment plan (SIP) dates in such a way that the amount gets debited within a couple of days of your salary getting credited to your bank account. With this approach, if you use your income for savings and investments first and then use the remaining amount for regular expenses, you will surely achieve all your financial goals.
Habit 2: Take charge of your financial responsibilities and liabilities and start investing early
You should start investing early, ideally the moment you start earning. There is no point in procrastinating by thinking or saying things like: “I am too young to start investing for retirement”, or “I am fit and healthy, and hence I don’t need health insurance right now” or “I will not buy term insurance because if I survive the plan tenure, all my premiums will go waste”, or “My children will fund their education on their own” etc.
You are accountable for your financial responsibilities (like building a fund for a child’s higher education and marriage, building a retirement fund for self and spouse) and financial liabilities (repayment of home loan, vehicle loan, and any other loans). Hence, you need to take charge of them and start investing in them at the earliest. It would be best to buy life and health insurance protection while discharging your financial responsibilities and financial liabilities.
The sooner you start investing in your financial goals, the faster and easier it will be for you to achieve them.
Habit 3: Avoid costly debt or repay it at the earliest
It is always better to avoid costly debt like credit card outstanding or personal loans. You should use credit cards, but only for the convenience they provide and benefit from the discounts and cashback offers. You should ensure that you always repay your monthly credit card bill in full. Never carry forward credit cards outstanding as they are the world’s most expensive loans charging 36 to 45% p.a.
Similarly, you should avoid personal loans for things like buying a consumer durable or going on a vacation. It is always a better idea to plan these things well in advance and start a recurring deposit or debt mutual fund SIP by putting some money aside every month for these things. Use the accumulated amount to buy the consumer durable or enjoy that vacation.
Habit 4: Build additional sources of income, preferably passive income
Always look at creating sources of additional income, preferably passive income. These include interest income on debt products, dividend income on direct equity and equity mutual fund investments, rental income from property, etc. You can use this additional income to take care of some of your desires that you cannot fulfil from your primary source of income.
Habit 5: Don’t be an impulsive buyer
Whenever you decide to buy anything, pause and give a deep thought to whether you need that thing. We often end up buying something just because other people (relatives, neighbours, colleagues) have them or are good to have. We saw an appealing advertisement, or it was available on easy EMIs, etc. Postpone the purchase for a few days and later think if you still need it. If yes, then check if you can rent that thing or buy it from the resale market or if you can buy a cheaper substitute. When you buy things impulsively, remember Warren Buffet’s quote: “If you buy things you do not need, soon you will have to sell things you need”.
Habit 6: Set SMART financial goals
Everybody has goals, in fact, a lot of goals. So, firstly, you need to segregate between financial goals and other goals. Next, you should have SMART financial goals rather than loosely defined financial goals. A SMART financial goal is:
S (Specific): A specific goal is clearly defined. For example, I want to accumulate money is a vague goal. I want to build a fund for my child’s higher education is a specific goal. Specific goals have a much higher probability of getting achieved.
M (Measurable): A measurable goal is one whose progress can be tracked on some criteria. For example, I want to accumulate Rs. 1 crore for my child’s MBBS Degree Course is a measurable goal. Once you start implementing your goal plan, you can measure the performance regularly.
An (Achievable): An achievable or attainable goal is within reach. Goals should neither be too easy to achieve nor totally out of reach. Goals should be challenging but within the realm of possibility. For example, the above financial goal of accumulating Rs. 1 crore for a child’s higher education may seem impossible on the face of it. But, by consulting a qualified and experienced financial advisor, you can achieve the goal. He/she can make a goal plan with asset allocation, select financial products with the expected rate of return, and implement the goal plan to make the goal attainable.
R (Realistic): Achieve the goal given the resources available. For example, in the financial plan for the above financial goal of accumulating Rs. 1 crore, the financial advisor has factored in, say, an expected return rate of 12%. It will not be realistic to invest in fixed-income products and hope to achieve the goal. To achieve the expected 12% rate of return, you will have to invest some money in equity mutual funds.
T (Timely): Every financial goal has to be time-bound with a start and finish date. The finish date of the above goal of building a child’s higher education fund should be on or before the child is ready to take admission in a medical college. If the money is not available at the right time, then the child will not get the desired education.
Now that we have discussed all the attributes of a SMART financial goal let us redefine the goal. The complete SMART financial goal will be: “I want to accumulate Rs. 1 crore for my child’s higher education for which I will invest Rs. 66,964 p.a. (Rs. 5,580 per month) for the next 25 years with an expected 12% rate of return.”
Habit 7: Avail of professional services of a financial advisor
In the earlier section, we understood the importance of defining SMART financial goals. We can do that by availing of the financial advisory services of the Glide Invest platform. When you want to accumulate money for a financial goal like your child’s higher education, the Glide Invest platform can help you with:
a) A personalised risk profile assessment
b) Identifying your financial goals
c) Appropriate asset allocation
d) Making a financial plan for each goal
e) Automating the financial plan
f) Review and analysis of your financial plan
g) Hand holding you till your financial goals are achieved
The Glide Invest platform can be your guide throughout your financial planning journey for achieving all your financial goals.
Habit 8: Understand the power of compounding and benefit from it
Compounding is when the earnings from an asset are reinvested continuously to generate more earnings over time. While simple interest grows your earnings linearly, compound interest grows your earnings exponentially. This is why you should aim for compounding your investment returns. Some of the compounding parameters that influence your investments include the regular SIP amount you invest, the expected rate of return, and the investment time horizon. The general rule is that the higher the amount you invest, the higher the CAGR you expect, and the longer the time you invest; accordingly, the higher is the final corpus that you will accumulate.
Start investing early so that your investments get enough time to benefit from the power of compounding. Invest in equity mutual funds as they can give inflation-beating higher returns compared to other asset classes. Also, if you start early, age will be on your side, and hence you will be able to allocate a higher share of your investments to equity mutual funds. Once you start earning, you can start investing with a smaller amount. As your income grows, you can gradually increase your investments also.
To summarise, some of the best habits for financial planning and investments that you can inculcate:
- Save and invest first and spend the remaining income rather than the other way round
- Take charge of your financial responsibilities and liabilities and start investing early
- Avoid costly debt or repay it at the earliest
- Build additional sources of income, preferably passive income
- Don’t be an impulsive buyer
- Set SMART financial goals
- Avail professional services of a qualified and experienced financial advisor
- Understand the power of compounding and benefit from it
In the 21st century, technology has played a vital role in shaping up how we conduct our financial affairs. Today you can open up your phone and tap a few buttons to plan and systematically invest towards your financial goals with Glide Invest. You will get guidance for:
- A personalised risk profile assessment
- Identifying your financial goals
- Appropriate asset allocation
- Making a financial plan for each goal
- Automating the financial plan
- Review and analysis of your financial plan
- Hand holding you till your financial goals are achieved