Rising interest rates and high inflation are reminders to correct our past mistakes and tighten our finances to achieve our financial goals. Let’s discuss a framework for learning more about money management decisions that we call the 5S pyramid, which is also a 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 hierarchy of needs that is layered like a pyramid. He established a theory based on the basic human needs – food, clothing and shelter. After you have met your basic needs, your higher needs such as love, self-actualization, and achievement can be met.
Likewise, savings are the foundation of your financial goals — the essential thing you need. Choosing the right savings plan will lead to greater financial success.
In 2023, focus on your savings to get ahead with finances. Try to save 10% of our net income and 20% if you can. Lock up three to six times your monthly earnings in an FD for emergencies. Create a budget and use recurring deposits (RD) to ensure mandatory saving. Keep track of your income and expenses. Explore cost-cutting opportunities so you can improve your savings. Remember to park your money with reputable and well-capitalized banks when interest rates are rising.
2) Protect your life and health
The pandemic is not over yet. Despite this, insurance coverage in our country remains low. We’ve heard the news of new strains of Covid-19 ravaging countries like China.
Hopefully India is through the worst of this crisis. But health and life insurance are non-negotiable. Countries may emerge from this generational crisis, but individual crisis preparedness will always be paramount. Health problems can arise at any time. Take stock of your life and health insurance in 2023. Make sure you and your family are adequately insured to avoid the financial burden of health emergencies. As a rule of thumb, you can take ten times your annual income with you as a risk provision. For health insurance, you take your annual income once.
3) Money Management
Last year we saw personal loans grow a whopping 20%. Credit cards, loans against FDs and consumer loans are also the fastest growing credit segments. Despite rising interest rates, credit demand remains high. Credit is readily available, but be careful how you use it. For example, avoid paying interest on consumption and your daily necessities as it is unhealthy for your finances. Be smart about how you borrow and spend money. For example, you can opt for free EMIs on your credit card instead of taking out a costly personal loan. Borrow money, but always remember to pay it back in full. Keep your credit card spending within 30% of your total limit. Avoid late payments.
Check your creditworthiness monthly. Take steps like paying back your fees on time if your credit score falls below 750.
4) Set your financial goals
For stronger finances, you need to invest. Try to avoid getting into programs that promise overnight fortunes. Cryptocurrency is one such example; a question mark hangs over its continued legality in India. Online trading is booming, but the right investment advice is available to few. Data shows that it’s difficult for the average investor to beat indices like the Nifty50 and Sensex. Therefore, it can be easier to create wealth with a plain vanilla index fund. Before you do, assess your life goals, investment plans, risk tolerance, time horizon, and investment ability. Diversify your investment across multiple products carefully selected based on your financial goals and risk appetite.
Make the most of 2023. Set clear financial goals and choose the right investment products. For example, home ownership is a fundamental goal for many Indians. So think about how you will save and finance for your first home.
5) Financial security and awareness
When managing money and investments, peace of mind and security are paramount. For example, digital fraud and phishing attacks are on the rise. They transact daily via UPI, credit and debit cards, and Net Banking. Therefore, infosecurity is your financial security. Find out about ongoing risks to protect your money. Make sure you learn about financial compliance. Add candidates for your accounts carefully; Your family can access your investments and funds if anything happens to you.
After all, your money has to last a lifetime. Take care of your retirement savings, as you will need funds for your health, regular expenses, and other needs after you retire. It is possible to create this fund through a sound financial plan.
Get your finances back on track and let 2023 be the year you get your finances right. Happy New Year!
The author is CEO, BankBazaar.com. His first personal finance book, The Bee, The Beetle, And The Money Bug, is available now on Amazon and Flipkart.
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