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EVERYONE wants to be financial well off. We all aspire for better homes, cars and vacations. But are these signs of your financial health? You should not confuse owning a great car with a person's financial health. He may have bought the car on a loan and this is not a sign of being financially free.
So what is the meaning of financial health? Well, we can judge a person's financial health with the following parameters: Loans-the lesser, the better: In today's world, the mantra of the generation is `buy now, pay later'. Well, this is to your financial health, what eating donuts regularly is to your physical health. Loans are not bad per se, but having too many debts creates havoc not only with your net worth but also with your cash flow. This is because servicing that debt makes you save less, and when the equated monthly instalments (EMI) grow too big, you end up in the worst case scenario of a debt trap.
You need more loans to pay off older loans. It becomes a never ending circle.
Have more investment assets: Your assets are of two types, namely, personal, which includes your residential home, car, family jewellery and investments assets, which include your stocks, bonds and investment property. Many people believe their biggest investment is their home. They feel that's a great thing.
Yes, having a fully-owned house, without any loans on it, is a great thing, but it's not an investment. You use it only for your personal purposes. There is no income accrued from it, nor can you book any profits from it without thinking of first purchasing another home.
We are not saying that it is wrong to buy a home, what we are advising is that your investment assets should form a bigger chunk of you total assets pie. Stocks, bonds, additional investment in property, to name a few, will yield regular income as well as capital gains. In a worst case scenario, you can dispose them without affecting your own lifestyle. Can you do that with your home? Thus, it is advised that instead of going for bigger homes, buy a home that suits your budget, and invest more of your savings in investment assets.
Savings is the key: We have two people, A and B. A is earning Rs 2,00,000 per month and B is earning Rs 50,000 per month.
Generally everyone will feel that A is more financially healthy, but on further enquiry we see that A is spending Rs 1,95,000 per month on his living expenses. The bulk of these expenses are for maintaining his high standard of living. B, on the other hand, is spending only Rs 25,000 per month. Though A's income is more, his savings are much lower than B.
B is investing his savings well and will soon be more wealthy than A. It is not your income that determines your financial net worth but your savings.
Have a financial cushion: When you have bad back, you always want that extra cushion. Even the healthiest among us, sometimes fall ill and need that extra care.
The same applies to your financial health.
For moments like losing a job or medical emergency, you need to keep some funds as contingency. Ideally, you should keep three to six months expenses in a liquid avenue for such an emergency. Also, you should have the adequate insurance cover for life, health or property, if the same is needed.
Secure life goals: We have many people who have good amount of assets and feel they are financially secure. They do not realise that these assets may have to be used for their life goals such as retirement, child's education or wedding. For example, a person may have investments worth Rs 50,00,000 and might feel he doesn't need to do anything more, but he doesn't realise that his retirement corpus requirement is Rs 75,00,000 and his daughter's wedding will cost Rs 10,00,000. This means he will utilise his investments fully and still fall short.
What will he do then? Compare your investments with the funds required for your life goals. If there is a surplus, you are financially free.
With these points in mind, go ahead and take you own financial health check up. If any of you are strong on all points, congratulations! If not, do work on the same.
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Some of the Top performing Mutual Funds are
- HDFC Top 200 Fund
- ICICI Prudential Dynamic Plan
- DSP BlackRock Top 100 Fund
- Birla Sun Life Front Line Equity Fund
- Reliance Equity Opportunities Fund
- IDFC Premier Equity Fund
- SBI Magnum Contra Fund
- Sundaram Select Midcap
- UTI Dividend Yield Fund
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