Look, what we often think is that if we are earning a lot of money, if our salary is good or our business income is good, then we won’t face any problems.
This is incorrect because if this had happened, Vijay Mallya or Anil Ambani would never have faced financial problems. They were earning thousands of crores of rupees every month. After this, what was he doing with that money? There was something wrong here, and that’s why he went bankrupt.
So it is not important how much you are earning. What you do with the money after earning it decides your financial health and financial future.
In this blog, I will discuss four key pillars. If you take care of and follow these four pillars, then your financial health will remain good throughout your life, and your wealth will continue to compound.
Budgeting and Smart Spending
Pillar number one sounds theoretical, but I’ll share some practical hacks with you: budgeting and Smart Spending. Look, everyone creates a budget for the month, week, or year and also tries to manage it on paper or in an app.
But days go by, weeks, months, and circumstances change. The planning we had done, such as setting a budget for this year, saving a certain amount, and making an FD, all of this does not happen. And there is no lack of intention.
I know you try hard, but it does not happen. Why do you know? Because whatever we plan on paper or in an Excel sheet gets overshadowed by the everyday desires and compulsions of daily life. Desires and compulsions. Both of these derail our plans.
So, budgeting and financial planning will be effective only when they become an integral part of your day-to-day life rather than just being on paper or in an app. If financial planning is built into the structure of your life and day-to-day, then it will be followed.
You must have heard the 50-30-20 rule of financial planning. Where we say that you spend 50% of what you are earning on essentials like house rent, electricity, internet, ration etc. 30% of wants can include designer clothes, if you want to go to dinner, go on a holiday, want, go to a movie, go to an amusement park. All these expenses, plus 20%, should be covered by savings and investments.
Now, you must have heard this rule. For this, we use apps, budgeting tools, and reminders but are unable to follow them. This is a very simple method.
You should maintain at least two savings accounts. As soon as your salary arrives, divide your funds into these three savings accounts as per the 50:30 rule.
So that means savings account for 50% of your needs. This can be the account from which your salary or income is coming. So keep 50% of the money from where it was credited in the same account and spend it on your needs. Immediately shift 30% of the funds to your secondary bank account. From where you will spend on leisure, entertainment, and wants.
This expenditure gets overshot many times. So keep a separate bank account for that. The money in it will start decreasing. Now you know the rest of the wishes next month. For the last 20%, you can keep a third bank account for investments or on the day your salary is credited, set SIP in your primary bank account on the same day, keep the date of PF debit on the same day, keep it before or after, if you want to invest in stocks, then put that money in your brokerage account, it is good if you keep a third account, even if you don’t keep it, do whatever you want to invest from the primary account on the salary day itself.
Now, if you opt for my model of two accounts, it becomes challenging to implement, as you may be more cautious in execution. Still, if you keep three bank accounts and you shift the money on the first day itself, then more likely you will follow that discipline, so ideally, keep three but at least two bank accounts for savings, and I am assuming that most people will have two savings accounts, so there is not much extra hassle. It is going to happen.
Now, when you do this every month, you will divide the income into a ratio of 50:30; then, you will likely be able to follow this plan. And when you follow this plan, having now designed your life in this way, you will feel more confident. Your self-worth will increase in your own eyes, and you will be able to follow your thoughts more easily.
Otherwise, when we make big resolutions and are unable to follow through on them, we often feel a great deal of sadness. I feel guilty. Self-pity occurs. Frustration occurs. Many times, depression also occurs from there, so if we create such practical hacks in our lives, discipline gets forced into our lives.
Goal-Based Investing
The second pillar is goal-based investing. Look, we all start investing and do it well for some time. Then, as soon as the market becomes a little volatile, we start panicking and stop investing, and this is not what I am saying. This is what data is saying in January 2025.
As the population in India increases, so does the number of earning individuals. SIPs should increase every month in India.
But if I net out the amount of SIPs that increased and the number of people who discontinued, then in January, the SIPs decreased by almost 9% net.
Imagine the market shifted slightly, and 9% of SIPs were removed from the market. So this is very dangerous. Now, why does this happen? I have been calling this behaviour bad. Nothing is going to happen as a result of that.
Let me explain to you, practically, why this happens. For a simple reason: when we invest, we do it because money is being made. Recently, there has been a prevailing notion that we have earned a good income and, therefore, we must create wealth. Everyone invests to become rich. When you invest to become rich, some problems do arise. Because we are the only ones running at high speed towards wealth, money is decreasing in value.
So, we want to save our wealth quickly. That is why, if you want to bring discipline to investing, then investing should be for a specific goal, not a general one. And keep this goal in a place where you can see it regularly. So, if it is your goal that I need to buy a new house in December 2030, and for that, I have to collect Rs 1 crore.
You will remind yourself of this goal every day, and accordingly, you will follow the SIP. Then, in market fluctuations, you are less likely to stop that SIP because you know that if you stop, you will have to postpone achieving that goal. When you have a goal in mind, discipline will improve.
Whenever you invest, please do so with a clear goal in mind, and trust me, you will be more consistent. And we all know that the market fluctuates in the short term.
In the long run, the one who stays in the market earns more money. This is the theory. Practically, we cannot do this. The data suggests this, but when you invest in a goal and regularly remind yourself of it, you are more likely to stick with your investments. Please follow and see.
Financial Protection
The third problem is the lack of protection for our financial investments. I don’t know why we all consider ourselves immortal. We all assume that we will not fall ill. We take it for granted that we will not die. The occurrence of both these things is certain. It will happen. Yet, we do not protect ourselves and our families against it.
If you have to die, unfortunately, then take life insurance. We do not drive our car, scooter, or bike without insurance because if something happens, we will have to pay a loss of Rs 10,000 or Rs 5,000. But we continue to manage our health and life without insurance.
As if that bike became more important than our lives and our health. So, there is a little irony in our behaviour. It should not happen.
Whereas Trust Me, life insurance and health insurance are much cheaper than motor insurance, and your life is much more expensive than any motor vehicle.
So please understand this and make decisions rationally. When considering life insurance, also consider adding a critical illness rider. This way, in the event of a serious illness, you will receive a lump sum amount, allowing you and your family to navigate the financial difficulties more easily. When considering health insurance, be aware that the inflation rate for health insurance in India is 14%. That means health hospitalization-related expenses are increasing by about 14% every year.
So health insurance can help you with that. Just think, God forbid, if a major illness occurs and someone goes to the hospital for 15-20 days, then one has to take out SIP for years. You have to withdraw the FDs that you have made over the years. You can avoid all this by taking a health insurance policy for Rs. 1000. Please consider taking it. Now, some people do take insurance, but they do not take the right amount. Why? Because all they see is that the premium can be reduced anyway, and the person to whom they want to sell the insurance has to sell the policy, it is better to sell the policy with a lower premium rather than not selling it; then there will be no problem here.
There is some misguidance. Insurance and adequate insurance are both important. For your reference, I would like to inform you. This is the reference. He is very general. However, this will help you with your calculations.
Suppose you are in your 20s or 30s and are not yet married. If you are single and live in a T-1 city, consider taking coverage of Rs 10 lakh. There are numerous expenses in big cities these days. If you are a family of four living in a Tier 1 metro city, consider a coverage of Rs 10 to 15 lakh. Now, why not 10 lakhs on one and 10-15 lakhs on the other three, multiplying it by four times in total?
Because it is unlikely that everyone will fall sick in a single year, so taking Rs. 10-15 lakhs would be sufficient. The premium will also remain under control. But if you are in your 40s or 50s and if you have any pre-existing diseases like diabetes or hypertension, then you should take more amount. If you can afford it, then please buy it for a minimum of Rs 20 lakh.
Debt Planning
Look, there is only one way to become bankrupt. There is generally only one way to go bankrupt. How does he know that you took a loan and were unable to pay the instalment? If this does not happen, then most likely, no one will become bankrupt.
So, when you take a loan, you are exposing yourself to a much greater possibility of becoming bankrupt. The first thing to keep in mind is this, and the second thing to consider is that :
There are two types of loans: Decent Loans and Bad Loans. You can take a decent loan. Please avoid bad loans.
What are decent loans? Conceptually decent loans are those that help you increase your net worth or income today or in the future. Now, what could this be? A loan can be taken against any property—especially home loans, as they are often affordable. Student loans will enhance your skills. Business Loan: If you are confident and realistic, a business loan can help you up to a certain limit.
Which are those loans which are very bad? Those loans that you take for fast depreciating things. Expensive Phone You can afford a phone worth Rs 20,000, but you want a phone worth Rs 1 lakh. Rolling over the loan by paying the minimum amount on the credit card. The annual interest rate ranges from 40% to 50%. It’s a very bad loan. Wide Goods: The loan you take for consumer goods. They are expensive, and they also spoil in 2, 3, or 4 years. In the long run, they don’t add much to your life. Therefore, you should avoid these loans.
Remember one discipline while taking a loan. The total EMI of your total loans should not exceed 30 or a maximum of 35% of your monthly take-home salary. That is, if you earn 1 lakh every month, then paying an EMI of more than 35,000 will leave you feeling squeezed. You will have problems running the house. So keep this discipline in mind before taking any incremental loan.
Conclusion
Now, before you go and read another blog on the internet, take action right now because the motivation that has been created in you will not last long; otherwise, your priorities will change.
So, what can you start with right now? If you haven’t already obtained health insurance, you can start by getting it.
And yes, don’t forget to bookmark this article and keep liking it so that you can revisit this blog when needed.
If you feel that none of your friends or family is following these four pillars, please share this blog link with them.