The Good & Bad Of Financial Habits
We are creatures of habit, even when it comes to our money matters. While some habits can pave way to wealth and prosperity, others can lead to financial ruin. Sanket Dhanorkar provides a guide.
Source:ET Wealth
| Inculcate These | Junk These |
|---|---|
| Review Your Portfolio Keep track of your investments. If you don’t, you could end up with dud stocks & expose yourself to unnecessary risks. Weed out under-performers and re-balance the asset mix to keep the portfolio healthy *A 5-10 % deviation from original asset allocation should be the tolerance limit beyond which you should rejig your asset mix. |
Rolling Over Credit Card Debt Paying only minimum amount due leads you into a debt trap that can take years to come out of. While you escape late fees, the card issuer charges a very high interest on the outstanding that keeps compounding. Always pay off the entire outstanding as quickly as possible. * 36-45% is the annual interest unpaid credit card bills incur |
| Maintain A Budget If you don’t keep tabs on your spending pattern, you will never figure where the leaks are & how can you plug them. Start by creating a monthly budget so that you know how much you can keep aside for discretionary spends after taking care of essentials each month. *Follow the 50-20-30 rule to break up the total budget into fixed costs, investments & flexible spending |
Overspending On Luxuries Eating out often, catching a movie at the multiplex every weekend or going away for short breaks every now & then may give you a high, but will severely dent your savings. Outline a specific amount you can allocate to such spends in your monthly budget & stick to it. * No more than 30% of your monthly budget can be used for luxuries |
| Create An Emergency Fund A sudden illness, job loss or accident that keeps you away from work for a long stretch can severely dent your finances. A contingency fund will provide a buffer against unplanned expenses. Keep this money in a liquid or ultra short term debt fund. *6 months worth of income should be kept aside in a contingency fund. |
Neglecting Product Maintenance Simple maintenance work on your car, air-conditioner, or even the house can save you a lot of money on repairs & replacements. Putting off routine maintenance will only leave you with a fatter bill. *4-5 % is the cost of maintenance if you take into account the total cost of owning a hatchback over 5 years. |
| Have An Exit Strategy Without exit strategies for your investments, you could either end up riding your winners for too long only to see them sour or get stuck with duds. *20-30 % should be the stop-loss trigger for your equity investments |
Using Credit Cards For Rewards Avoid swiping your credit card for every purchase to earn reward points. Else, soon you would be living beyond your means. List the spends you can make with a credit card and those you cannot. *Purchases worth Rs. 75,000 will probably fetch around Rs.450 equivalent of cash in reward points |
| Pay Your Bills On Time Pay off bills as soon as your salary hits the bank account. If you regularly let payments run past the due date, you will rack up hefty late payment fees. Worse, your credit card will take a big hit *Try & pay off bills 10 days before the due date |
Using EMI Options For Credit Card Dues This can cushion the impact on your cash flow but may be harmful if used often. You are likely to end up paying more than the actual cost of the item, which is the interest for the EMI scheme, apart from processing charges. Too many EMI arrangements can also hit the credit score adversely. *Rs.1,10,209 is what you will pay in EMIs over 12 months for a principal amount of Rs.1 lakh (monthly EMI Rs.9074) assuming 16% rate of interest. |
| Be A Disciplined Investor Since you cannot spend what you do not have access to, opt for automatic transfer of funds to your preferred saving instruments the minute your salary hits your account. Allocate a reasonable proportion of your income to this end. *30-40 % of your monthly income should ideally be directed towards investments |
Ignoring Credit Score Every financial step of an individual is recorded in his credit history. Maintaining a good credit score is critical for availing loans when in need and at a good rate of interest. * A score of less than 750 is considered a bad credit score. |