Saving your money and investing it smartly is the key to building wealth. All you need to know is a few basics, then develop a plan, and stick to it. Even when you start with a small amount, you may be able to take advantage of several investment opportunities.
Here are three ways in which you may check your financial health and make changes as required.
- Check for contingency reserves
Have you considered how you would meet your monthly expenses if you lose your regular source of income? This is possible by building a contingency reserve. It is recommended that you must maintain a reserve to meet at least six months of your expenses in case of loss of income.
- Analyze your total debt
It is likely that you may have a home and/or auto loan and even some credit card debt. It is advisable to ensure all your monthly installments do not exceed 40% of your income. Furthermore, you should pay off high-cost debt like credit card bills on time to ensure you do not face a financial crisis.
- Determine insurance coverage required
Securing your family’s financial future in case of any tragedy is very important. You should also ensure that you are able to meet treatment expenses in case of a medical emergency. These objectives are easily achieved through life and health insurance plans. The recommended life coverage is 10 times your annual income.
Once you analyze your financial health, the next question is when and where to invest. Here are three ways that may help you make an informed decision.
- Start as early as possible
It is important that you do not delay your investment decision. When you commence early, you are able to benefit from the compounding effect. This means that you are able to earn returns on the profits earned on your investment. As a result, you may build a larger corpus to meet your financial goals.
The common saying “do not put all your eggs in one basket” is true for investing too. All financial products like equities, mutual funds, bonds, and company deposits have certain inherent risks. When you diversify your investment in different instruments, you reduce these risks. An adverse movement in one product is off-set by the changes in other instruments included in your investment portfolio.
- Systematic investment plans (SIP) or lump sum
You may not always have a large lump sum amount to invest. Therefore, regular monthly SIPs will help you inculcate regular savings and investment habit.
While saving and investing help achieve financial well-being, cutting down on unnecessary expenses is also advisable. Regular monitoring of your investments and taking care of small things will go a long way in ensuring your financial health.