Learning To Be Financially Savvy
Being financially savvy could sound like a daunting task, especially if your spending mantra is #YOLO, Carpe Diem, or something along the lines of living in the present moment.
It’s time to change your love-hate relationship with money management and realize that being more mindful and aware of your resources actually allows you to seize opportunities in a more sustainable way.
Here are some tips to get you started on the path to becoming more financially intelligent.
Manage Your Debts and Review Them Regularly
“Borrow as little as possible” is just about the vaguest advice you can get about debt. Although that obviously makes sense, managing debt goes beyond just trying to borrow as little as possible.
Take your biggest loan, which is probably your housing loan, as an example. How aware are you about the interest rates that you’re paying, and do you know about the general trends and new loan packages that you can take advantage of?
Keeping to the mortgage package that you signed up for years on end could have you spending thousands more than you should. Review and refinance your home loan about once in three years so that you keep your cost of borrowing as low as possible.
Another way of managing debt is to do debt consolidation, if you’re in a situation where you find yourself deep with multiple debts and you’re having trouble keeping up with the varying interest rates and cycles. For example, credit card bills and credit lines can have very high interest rates of up to 24%.
What you can do is to take one single loan at a much lower interest rate to pay off your existing loans. Of course, this doesn’t really treat the root cause of why you’re spending so much on credit, but it is a very useful tool in situations like these.
Make sure that you have an annual review for your debts if they are manageable with your current and near-future income. You may have to make difficult decisions, like selling the car, for example, to ease your debt burden until your situation improves.
Prioritize and Divide Your Savings
Savings isn’t just a chunk of money that you set aside every month. Having the discipline to put at least 10% of your savings aside is only the beginning. There are different functions for savings, and knowing how much to save for what function requires some thought.
For a start, make sure that you have a comfortable amount for emergencies and rainy days. An emergency fund equivalent to at least six months of expenditure is usually the recommended amount to tide you over any period of possible unemployment or family emergencies that come up.
Make sure you have that as a baseline and never dip into that account. You may even want to set up a separate account just for that purpose.
What Else Can I Do?
There’s also savings for future expenditure such as holidays, big-ticket items, a wedding, and the likes. Watching this account grows can be very satisfying, as you get closer to the amount that you need for your big project. Delaying gratification instead of spending it all with credit is a much more sustainable and safer way to go.
Finally, set up a separate account for your retirement. If you’re still very young, this could be an account that you use for investments. Similar to the emergency account, the goal is not to tip into this bucket as and when you like for expenses that should come out from your monthly budget.
Learn to Invest
Being financially savvy is also about knowing how to grow your money, in addition to saving. The simple reason behind investing is that money in the savings accounts loses its value thanks to inflation, and bank interest rates aren’t going to help.
There are many ways to invest, and it does take time to learn. From bonds, stocks, mutual funds, to more illiquid investments like real estate, or even ornamental fish. Ultimately, your investment preferences will depend on many factors, such as your risk appetite and your available cash to invest.
Ideally, you would eventually work your way to a diversified investment portfolio that consists of investment products with varying degrees of risk. Don’t put off investing simply because it sounds like a difficult thing to do. It really isn’t, especially when there are many free resources on the Internet that can teach you the basics.
Also, the power of compounding interest means that the earlier you start, the more time you have to grow your investments. Investing $10,000 at age 25 will probably yield you a lot more than investing at age 35, simply because you have had 10 more years to grow your returns.