Most of us have developed our own philosophy when it comes to personal finance. We often find ourselves emulating the habits of people we admire and come up with a financial mantra that works for us.
That being said, adequate savings and right investments lie at the heart of countless financial success stories.
It is in this context that these five tried-and-tested money tips are significant to those who want financial stability.
Tip 1. Pay your future-self first
The general rule is that you must save a minimum of 10% of your income every month.
In order to actually be able to do it, you need to set aside the funds for your savings as soon as you get your salary (preferably in a separate account), even before you start paying your bills.
This ensures three things:
- You actually save some percentage of your income each month.
- You learn to manage your expenses with the rest of the money.
- You get into the habit of saving.
The general consensus is that by saving 10%, you’re not overburdening yourself, and you still have a significant portion of your income left for your expenses.
If you just save 10% of your income, let’s say for 20 years, there’s a good chance you could attain financial independence when you retire.
But the 10% figure is not a one-size-fits-all rule. The amount you save depends on your financial situation. If you earn more, then it is a good idea to save around 20 to 30% of your income. The same applies if you are starting to save late.
On the other hand, if you find it difficult to save at least 10% (maybe owing to piling debts or a small income), don’t be discouraged.
Save as much as you can. The whole concept behind the first rule is to get into the habit of saving on a regular basis.
Tip 2. Savings must be put to work with smart investments
The second tip is all about growing a portion of your savings with smart investments. But before setting out on your investment path, ensure:
- Your investment choices are aligned with your short-term and long-term financial goals.
- You have complete clarity on the risks and rewards involved with every investment instrument you choose.
- You aim to diversify your investments (into multiple low, medium and high-risk instruments) in order to offset the combined risk quotient.
You don’t want to lose your savings due to bad investment decisions, so invest smartly.
Tip 3. Invest where your heart lies
Choosing the right investment portfolio is extremely important. It is not possible to accurately predict which sector or company will do well but that’s not the focus here.
Famous investors and venture capitalists created their success by investing in areas of their expertise. They used their knowledge of a particular field and invested in technology that furthered their passion.
If you too do this, it means you have an edge because you are already familiar with the ins and outs of the sector.
You can also consult financial experts, read books (like these) and articles to get credible information, build smart perspectives and make informed financial decisions.
An added advantage of this tip is that it protects you from falling into traps set by scam artists.
Tip 4. Learn to segregate needs from wants
There is a subtle yet important distinction between our day-to-day needs and wants. “I need groceries but I want imported coffee.”
While the difference is small, the impact of not understanding it could prove to be expensive. Every time you want to purchase something, ask yourself if you need it or want it.
You must learn to stick to the “need” purchases rather than “want” purchases on your path to financial stability. Unnecessary expenses will very easily eat into your savings if you are not careful.
Tip 5. Build a cash emergency fund
A sudden unexpected job loss or accident may drastically reduce your savings, or worse, leave you in debt. A simple solution is to remain financially farsighted and have in place at least three months income as your cash emergency fund.
While some would argue that fixed deposits qualify for an emergency fund, it’s better to have the funds parked in a savings account as you can quickly access it as you face an unanticipated situation.
Withdrawing an FD before maturity may take some time and will surely result in loss of interest earned.
Whether you want to save up for your retirement or increase your wealth, these simple tips can be an excellent foundation to build your future on.
This article first appeared in BBazaar.my
BBazaar Malaysia (BBazaar.my) is part of BankBazaar International, the world’s leading neutral online marketplace that helps people decide on financial products such as insurance, credit cards, fixed deposits, saving accounts, mutual funds and many more.