“Money moves the world”, each one of us would have heard this at some point in our lives. Yet, so many individuals keep gasping for money both during and after their work lives. What is it that would take them to become financially free? How can they be financially free?
Financial literacy can be defined as the capability of an individual to make informed decisions on money matters. These are the decisions that would lead one to financial freedom.
Akin to lack of education, that can lead to serious repercussions in life, unawareness on money matters can have a devastating impact on their financial lives.
The following are seven important steps for one to become and stay financial literate.
The first step on achieving financial literacy is to accept that one needs to acquire knowledge on this front. Unfortunately, a lot of us live in a state of denial and do not accept that there is a need to learn to manage their hard earned money. Acceptance will lead to one exploring and learning the nuances of money management.
The second step would lead to analysis and establishing both financial requirements and objectives. One has to be aware of the present and future “money” needs. While ‘ignorance may be bliss’ at certain times, when it comes to personal finances can only lead to stressful conditions.
At a practical level, one must draw out a budget under three heads. First, the essential expenses like food, education, housing etc.; second, creating a backup fund and third the money that would go towards achieving long-term requirements like child’s higher education, marriage, retirement etc.
If one was to follow Warren Buffett’s advice, one should only spend what is left after saving. While all may not be able to follow this advice, but setting aside an amount that would meet long-term fund requirement has to be managed with discipline and sincerity.
Acquiring knowledge on various products that are available to invest in is the third step. Another important piece of knowledge that one needs to seek here is the returns that can be expected and the risk associated with it. Depending upon a person’s risk appetite and her juncture in life, she may allocate her income and assets to various investment avenues.
While all steps are significant, a disciplined approach is what possibly would get the highest ranking if one was to rate on importance. The two most important factors under this meaningful step are:
Long-term approach: One has to be cognizant of the fact that financial investments would reap benefits only if the approach is long term. One must not try to gain high returns in the short term. One must remember that there are financial cycles. There may be times when owing to market conditions, the investment would not be delivering expected yield, but one must persist to hold on in such times
Discipline to invest: This is where most of the people go wrong. One must persist to invest without exception. Sticking to a plan is the key.
Staying involved is the next key step. One cannot just invest and forget it. Ongoing evaluation and taking corrective action is of equal importance. Regular evaluation will lead to a better understanding of the product and will help in the even better management of future investments.
The market pundits state that exiting an investment is also as important as investing itself. And this can only happen if one is engaged on an ongoing basis.
6. Hire Only Trustworthy Advisors
Investing in tips received from unreliable sources or from one who is not an expert can lead to rapid erosion of hard earned money. All the effort that would have gone into a methodical investment can come to nought by following wrong advice.
Seeking expert advice always helps. While one will be able to acquire substantial knowledge, it may not be possible to keep abreast with day to day changes owing to time that one needs to be given to job, family and other affairs in life.
7. Borrow Responsibly
The last but a highly important step is to differentiate between a good and a bad debt. A debt that would help one to either grow wealth (like a home loan) or one that would aid in making more money (like a business loan) are ‘good’ debts. Any other loan that would not address the above two factors can be termed as ‘bad’ debt.
Identification of good and bad is vital. Like a debt to buy a car for the better commute to the office can be good since it might help in saving time and energy. But, buying a high-end car for the same purpose may be a bad debt, especially if the loan is taking the person away from her long-term savings goals.
Arun Ramamurthy is the founder and director of Credit Sudhaar, a credit advisory services company.
First Published: IST