Sometimes the simplest of activities result in bad financial management. These can be easily avoided
There are some things in life that we do involuntarily, like breathing. Or, for instance, while driving we apply the brakes without even thinking about it. This also applies to our money managing and financial habits. Having good financial habits is a rarity. Sometimes it’s the simplest of activities that cause poor financial habits and can be avoided by following a few simple rules.
Save first, spend later: When you are assigned to complete a task within one week, you are most likely to take the entire seven days to finish it. However, if the same task needs to be wrapped up in five days, you will do it anyhow. It’s the same with spending money. As soon as you get paid, you tend to start spending it by first paying all your bills and then indulging in shopping. You tend to spend higher than you intended to and this results in fewer savings. Financially-smart people do the exact opposite. So, it’s better to put a portion of your earnings into an automated deduction mode for investments. Take care of all your other expenses after you do this.
Needs vs wants: Thinking that making more money is a way to be financially free is a mistake many of us make. Until and unless you don’t respect your hard-earned money, your spending will expand to consume all your earnings. No matter how much you earn, your expenses will keep on increasing with your rising income. So, making more money and letting your expenses eat all of them will get you in some serious financial trouble. Saving first and spending later is the way to get financial freedom. Even for rich people, it doesn’t stop at a big bungalow, or a luxury car. It will go on to owning a private plane, a yacht, a private island and so on. Do you think there is any amount of money that is sufficient to fulfil unending desires? The answer is an emphatic “no.” The key is to differentiate between your needs and wants. Ask yourself, “Do I really need this?” By going after benefits like rewards and discounts that credit cards offer, people end up spending way more than they would have spent otherwise. This just cancels out all the benefits of having these credit cards. Buying something you don’t need, even at a discount is an avoidable spend.
Keep track of your money: If you are not sure about how you’re spending every month, then it’s time to consolidate everything. You can do this in many ways. One of the easiest methods is to use a money management app. There are quite a few of them out there that can help you keep track of your transactions. Organising your finances can be a good start to managing your money better.
Don’t compete or compare: Everyone around you has different tastes and budgets. Be it in cars, food, travel, clothing and other accessories. So if you are one of those people who try to keep up with everyone even when their budget doesn’t allow them to, then this is going to leave you in debt. Also, don’t be fooled by the lavish social media posts of some of your friends that show their exotic lifestyle. Doing things as a status symbol will trap you for the rest of your life.
We live in a society where almost everyone carries a debt on their shoulder. Just because everyone lives with debt doesn’t make it normal for you to have it too. Don’t make it a habit to get your resources on loans every time. Get them on debt only when necessary and pay it off soon to avoid ongoing interest every time.
Once you begin saving money, set aside a weekend to learn about investing and get started on that path as soon as you can.
(The writer is founder, Surmount Business Advisors. The views expressed are personal.)