Rising interest rates and high inflation remind us to correct our past mistakes and simplify our finances in order to achieve our financial goals. Let’s discuss a framework for learning about financial management decisions, which we call the 5S Pyramid, also part of my new book on personal finance, ‘The Bee, The Beetle, And The Money Bug’.
1) Start Saving More
Abraham Maslow, an American psychologist, developed a pyramid-like hierarchy of needs. He established a belief based on basic human needs – food, clothing, and shelter. After your basic needs are met, your higher needs, such as love, self-actualization, and achievement, can be met.
Similarly, savings are the foundation for your financial goals – the most important thing you need. Getting your savings plan right will lead to better financial results.
In 2023, focus on your investments to get ahead financially. Try to keep 10% of our take home income and 20% if possible. Lock three to six times your monthly income in an emergency FD. Make a budget and use recurring deposits (RD) to ensure savings. Keep track of your income and expenses. Find ways to cut costs to improve your savings. Remember to park your money in reputable banks with good deposits as interest rates rise.
2) Protect Your Life and Health
The disease is not over yet. However, insurance remains low in our country. We have heard news of new strains of Covid-19 ravaging countries like China.
Hopefully, India has passed the worst of this crisis. But health and life insurance are non-negotiable. Nations may emerge from this generational crisis, but individual disaster preparedness will remain. Health problems can happen at any time. In 2023, check your life insurance and your health. Get enough insurance for you and your family to avoid financial stress due to health complications. The rule of thumb is that you can take ten times your annual income as a period. For health insurance, take one times your annual income.
3) Financial Management
Last year we saw personal loans growing by 20%. Credit cards, loans against FDs, and consumer loans are the fastest growing loan segments. Despite rising interest rates, credit demand remains high. Credit opportunities are available, but be careful how you use them. For example, avoid paying interest on food and your daily needs, because it is not good for your money. Be smart about how you borrow and spend. For example, you can opt for zero-cost EMIs on your credit card instead of taking an expensive personal loan. Borrow money but remember to pay it back in full. Keep your credit card spending within 30% of your total limit. Avoid late payments.
Check your credit score every month. Take steps like paying off your debts on time if your score drops below 750.
4) Set your Financial Goals
For stronger money, you have to invest. Try to avoid entering into schemes that promise wealth overnight. Cryptocurrency is one example; a question mark hangs over its legal continuation in India. Online trading is witnessing an increase, but the right investment advice is available to only a few people. Data shows that it is difficult for investors to buy indices like Nifty50 and Sensex. Therefore, creating wealth with a clear explanation of the vanilla index can be easy. Before doing that, evaluate your life goals, investment plan, risk appetite, time horizon, and ability to invest. Diversify your investment across a wide range of products, carefully selected according to your financial goals and passion.
Make the most of 2023. Set yourself clear financial goals, and opt for the right investment products. For example, home ownership is a major goal for many Indians. So think about how you can save and finance your first home.
5) Financial Security and Promotion
When managing money and investing, peace of mind and security are paramount. For example, cyber threats and phishing attacks are on the rise. You do transactions every day through UPI, credit and debit cards, and websites. Therefore, infosecurity is your financial protection. Educate yourself about ongoing risks to protect your money. Make sure you learn about financial compliance. Carefully add selected people for your accounts; your family can get your investments and money if something happens to you.
Finally, your money should last a lifetime. Pay attention to your retirement savings, because you will need money for your health, basic expenses, and other needs after you retire from a busy working life. This money can be built through a good financial plan.
Get your finances back on track, and make 2023 the year you get your finances right. Happy new year!
The author is CEO, BankBazaar.com. His first book on personal finance, ‘The Bee, The Beetle, And The Money Bug’ is now available on Amazon and Flipkart.
