Five steps to a healthy financial life

Follow these to secure your financial well-being and enjoy a happy and peaceful life.

Being prudent and proactive in your financial affairs is bound to reap benefits. And the best part is that it is not a Herculean task. Baby steps in the right direction can ensure that you have a healthy financial life and are at peace with yourself as far as monetary affairs are concerned.

Let us look at five steps which can push you towards a healthy financial life.

1. Build a contingency/emergency fund

This is the first step as you start out on your financial journey. Emergency means 'serious and unexpected situation requiring immediate action'. It could be a medical emergency, losing one's job or losing one's home in a calamity.

The last thing that you want in such a situation is to be cash-strapped. Hence it is prudent to set a part of your monthly income aside for such a day. Anywhere between 4 to 6 months of your expenses should be set aside in safest and most liquid instruments. This should be the contingency fund and should never be touched for planned expenses.

The author is chief evangelist, Perfios.com

2. Know how much you earn, spend and save

Saving is critical to secure your future and meet important goals in your life. Your ability to save during your working years will determine the quality of your life in both your working and retirement years.

In order to know if and how much you can save, you first need to know how much you earn and more importantly how much you spend. While people easily know how much they earn, they only have a rough estimate at any point in time about how much they spend.

Often those estimates are far from reality. 

Keeping a budget definitely helps. Even if it is done for a short period, it helps you know your cash flows and enables taking important decisions regarding investments.

You can record your expenses using online tools from Perfios. It can also decipher your credit card statements to analyse your spending pattern.

As a thumb rule, you must save at least 15 per cent of your income, if not more.

3. Cover your risks

This step is very critical to ensure that you or your family is not in financial trouble if any risk were to materialise. Here we are talking about risk to life, health or property.

Loss or disability of the bread winner of the family can leave the family in a dire situation. A medical illness can eat up into entire savings of the family.

While such instances cannot be controlled in totality, one can at least be prepared to face the financial fallout of the event. This is possible only if a person is adequately insured. Hence, ascertain your risks and cover the ones which you know you would not be able to bear yourself.

4. Know your goals and plan for them

Whether we acknowledge them or not, we all have certain financial goals in our life. There may not be much of a choice when it comes to certain critical goals such as those relating to children or retirement, but there can also be certain aspirations or dreams which we want to fulfil in our lifetime. There has to be a purpose behind all the hard work that goes into making money and this purpose is beyond the survival needs.

It is good to put your goals down in black and white and check if you are on the right track to achieve them. You may do this on your own or hire the services of a professional but it is an important exercise to do. Only saving is not enough, savings have to be invested prudently to make sure that you achieve your goals.

5. Track and review your investments

Of what use is an investment or insurance if in your absence, your family has no clue about it. The spouse or a family member should be kept informed of all the financial transactions one has entered into.

It is very important to consolidate your entire investments, insurances, bank balances, loans, credit cards and keep it accessible. This is also very important from the point of view of tracking and reviewing your portfolio.