Most of us during our entire career and working age focus on increasing our income as fast as possible . But one need to understand increasing only income will not solve all your financial problems .Because earning alone doesn’t guarantee the financial independence and peace of mind .
It has been evident from the past that good income doesn’t guarantee to save a lot and become richer in future . You all must be knowing this famous sports person , who earned in millions during their sports career eg; Mike Tyson , Evander Holyfield , Allen Iverson they are few of the famous players who earned more than 200 million dollar in their career and are now under debt with no savings . So the point is good income alone is not a solution to all your financial problems .
Our financial planning foundation stands on four pillars Income , Saving , Investment , Discipline . If any of your pillar is weak , all your efforts will be go waste .
- What is Income ?
Income is the money which we receive as individual or business in exchange of providing goods or services or through making an investment . eg salary , rent , profit. We use this income to meet our day to day expenses .
Points to remember about your Income.
- You should always have a regular source of income to meet all your expenses
- Your income should always exceed your expenses .
- If your expenses are exceeding your income on regular basis , you should either plan to increase your income or to decrease your expenses.
- You should always have a back up plan for your income.
- You should always look for passive source of income .
You should understand income act as take off gear for your personal finance planning .
- What is saving ?
Amount which is left with you after meeting all your monthly expenses is your saving for the month.
Saving can actually only come to existence if your income is higher than your expenses. Saving should be a habit just like eating and sleeping on time daily .
Why saving is important ?
- Saving provides financial security against unforeseen events in life.
- Savings gives to cushion to invest money for future goals.
- Savings help for emergency financial needs.
How much should we save ?
The thumb rule of saving is 50/30/20, you should reserve 50 percent of your income for essentials like rent and food, 30 percent for discretionary spending such as money spent on luxury items, vacations, and nonessential goods and services., and at least 20 percent for savings.
But their should be no rule for saving ,the saving should be always linked to your future goals and necessities . You should always understand saving too much and too less both are not good for your personal finance . You should understand financial planning is not always about your future , it should also be about living today . You should not sacrifice your todays need to fulfill the future needs.
Your saving should be calculated as per your future requirement and need , its should not be done with closed eye without proper planning and right balance of saving .
- What is investment ?
Investment is an act to put some part of your money in an asset class to generate higher return in future . Such as buying shares , mutual funds with long term objective.
Why should I make investment ?
Investments are always made to safeguard present and future financial goals and security . If you have any long term financial aspiration such as buying house , child education , child marriage or retirements. Suppose you want to send you child for higher education to foreign country and you don’t have sufficient fund for that right now , but you have time of 10 to 15 years , so in that case you can start investing small amounts every month , so that by next 15 years you will have sufficient amount to fund your child education.
What are the different type of investment options ?
Below are the most popular investment options available in the market for both long and short term investment .
- Fixed Deposit
- Recurring Deposit
- Mutual Funds
- Real Estate
How much one should invest ?
This purely depends on ‘ how much your are saving “ and how much you need for your future goal . Your investment should always be aligned with your goal . Suppose you have 5 goals for future and you have the estimated amount you will require , so the investment should be made in same proportionate to meet all your goals.
Investments should always be made with proper research and analysis because your hard earned money is at stake . If you don’t have adequate knowledge on investments and its avenue its always advisable to consult some good and reliable financial adviser before proceeding . Most of the time our reluctance to pay fees to financial adviser and make the investment by self or on the advice family members and friends cost you a lot .
- What is Financial Discipline ?
Financial discipline is nothing but your willingness and attitude towards money . Its basically your approach towards your Income , savings and Investment .
One should understand the importance of financial discipline , because in the absence of discipline all the other three pillars mentioned above will never come to existence . Financial discipline should be followed religiously ,to achieve your financial independence .
Note: When we have all the above mentioned four pillars at right place with equal strength , than only your financial planning can begin its journey towards its goal of financial independence .