Growing up, we all heard the proverb “Health is Wealth.” While it might have been used to refer to physical health, being financially healthy is no less critical. Just like being physically fit can help decrease your medical bills in the long term, being financially healthy can help ensure your long-term financial security.
However, as each of us is unique with different financial goals, there is no “one size fits all” system to ensure one’s financial health. In fact, many different things can contribute to an individual’s overall financial health and well-being.
In this blog, we will discuss the 10 tips that can help you boost your financial health.
Create a budget that works
Every journey begins with a first step, and creating a budget is a crucial first step in your journey towards being financially healthy. Creating a budget can help you manage your expenses better and increase your savings, which will positively impact your financial health.
However, you have to be realistic when creating the budget. Setting unrealistic goals with respect to decreasing expenses or increasing savings will make it impossible for you to stick to your budget. This can harm your financial well-being in both the short and the long term.
For example, suppose you are currently spending 80% of your monthly income to cover your expenses and create a budget with the goal of saving 50% of your income. Unfortunately, reducing your monthly expenses by 30% is probably an unrealistic goal to set for yourself and will be very difficult, if not impossible, to achieve.
Set investment goals
Setting investment goals that you want to achieve can contribute significantly towards ensuring your financial health. Without well-defined goals in mind, you cannot make plans to reach them. Not setting investment goals is like driving your car without having a destination in mind– in all probability, you will end up driving in circles and reach nowhere.
When setting yourself financial goals, you can use the acronym– SMART. This is because your financial goals need to be Specific, Measurable, Achievable, Realistic, and Time-bound.
Create an Emergency Fund
As part of your overall financial plan, you have to consider the possibility of emergencies that might occur. These emergencies can take various forms such as job loss, unexpected expenses such as car repairs, replacement of expensive home appliances, etc. Unless you have an Emergency Fund to deal with these unexpected expenses, your savings will get depleted. Even worse, you might even have to take a loan and bear the extra cost of interest payments to overcome the emergency.
You might wonder how large an Emergency Fund will be sufficient to deal with such unexpected expenses. To be on the safer side, you should consider putting aside an amount equal to your monthly expenses for 9 to 12 months for emergencies. While it is quite possible that you would not need to use up your entire Emergency Fund in one go, having some extra funds during an emergency is better than falling short.
Buy insurance to protect your financial goals
An Emergency Fund might help you deal with a few types of unexpected expenses. However, having insurance can also contribute to your overall financial health. In the case of medical emergencies that require hospitalization, a Health Insurance Plan can significantly reduce your financial burden. As you do not have to pay all medical expenses out of pocket, you will be able to keep your savings intact and stay on track to reach your financial goals.
Similarly, if you purchase a Term Insurance Policy, you can ensure that your near and dear ones will be financially secure even after your death. While having a Life Insurance Policy is recommended for everyone, it is especially important if you are the sole earner in your family.
Invest to make your savings grow
As part of your budget, you would have started saving some money every month. But keeping it in a Savings Account and earning interest at 3% to 4% p.a. might not be sufficient for reaching your financial goals.
One way to get your savings to grow faster is to start making investments. However, choosing the right investment based on your unique requirements will require some effort on your part. Key factors that can influence your decision to select a specific investment route include the duration of investment and your risk profile.
For example, suppose you are saving towards a short-term goal such as the down-payment for a new car you want to buy next year. In this case, opting for Debt-oriented investments such as Debt Mutual Funds would be a better fit than Equity-oriented investments. However, if you are saving for a long-term financial goal, opting for Equity-oriented investments such as Equity Mutual Funds will give you a much better chance of reaching your financial goal.
Don’t change investments to chase high returns
After you start investing, you might come across friends and family members who claim to have made investments that are giving substantial returns. This might tempt you to consider changing your current investments to achieve similar high returns. This can, however, hurt the overall performance of your investment portfolio.
One reason for this is that there is no guarantee that an investment that is currently performing well will continue to do so in the future. Additionally, some investments such as Equity-oriented Mutual Funds might not perform well in the short term. Still, in the long term, their ability to give inflation-beating returns is unmatched.
To ensure that your investments have adequate time to grow your wealth, you should select suitable investments based on your financial goals and stick to them.
Use asset allocation to reduce risk
Asset allocation involves spreading your investments across multiple asset classes such as Equities, Debt, Gold, etc. The aim of this is to maximize returns and minimize risk irrespective of prevailing market conditions. To decide how much you should invest in different asset classes, you have to consider your age, risk tolerance, current liabilities, investment goals, etc.
When choosing different investments for your portfolio, you need to focus on selecting asset classes that are unaffected by each other’s performance. This way, even if your investments in a specific asset class are underperforming, other investments in your portfolio will have the potential to deliver returns. This way asset allocation ensures that your overall portfolio will be better placed to grow your investments irrespective of current market conditions.
Diversify your portfolio
Even though spreading your investments can help reduce the overall risk to your investment portfolio, there is still some scope for improvement.
After you have selected the asset classes that you want to invest in, you should consider diversifying your investments across multiple options within the same asset class. Doing so will help you reduce the overall risk to your investment portfolio further by spreading your investments across the same asset class.
For example, in the case of Equity-oriented investments, you can consider diversifying your investments across key categories such as Flexi-Cap Equity Funds, Large Cap Funds, Mid-Cap Funds, etc.
Know what you are investing in
A common mistake that many investors make is choosing investments without understanding what they are investing in. If you invest blindly, you may put your hard-earned money at risk unknowingly, which can adversely impact your financial health.
For example, in recent times, many have invested in cryptocurrencies. While some have made money, a majority have ended up losing money. One major reason for this is because many of these investors had little knowledge of how these investments actually work.
To prevent this from happening to you, do adequate research to understand what the investment is all about. While there might still be a margin of error in your research, you would still have reduced the risk of making a wrong investment significantly.
Check your investment portfolio periodically
Even though changing your investments often is not a good idea, investing and forgetting all about your investments is also not a sound strategy to ensure your financial health. To ensure that your chosen investments are performing according to your expectations, you will have to periodically check your portfolio and make changes when necessary.
However, you have to ensure that you do not check the performance of your investment portfolio too often. Ideally, you should perform this check once every year. If that seems like too long a time, you can consider making such checks once every 6 months. If you perform these checks too frequently, you risk making frequent changes to your portfolio. This can harm the performance of your investments and negatively affect your financial health.
Being financially healthy is not a one-time exercise but a process that needs to be repeated over time. In that respect, financial health is not much different from physical health. However, just like daily exercise and a good diet are necessary to ensure physical health, maintaining financial health over time also requires continuous effort.