Women have always played a significant role at home and at work. Therefore it’s important for them to know the best financial practices for minimum expenditure and maximum returns.
Here’s some sound advice from Anil Rego, CEO & Founder, Right Horizons
There is a common misconception that men are always in charge of household finances. This is not really the case in many houses, where it is the women who actually hold the purse strings. Ideally, one should plan the family finances keeping one’s spouse in mind and also in the loop. Let us look at some of the best financial practices that every woman should be aware of.
Prepare a budget: A budget helps you to plan your finance and, if you manage to stick to the budget each month, you will be surprised at the benefits it offers. It is more than likely that you will end up with more money in the bank each month than you thought was possible. The budget should take into account the spending pattern of both you and your spouse, and it should also break-up the expenses into essential items and avoidable/luxury wants. This will make it easier to cut down on unnecessary spending. Once you have prepared the budget, take into account various priorities. For example, you may have to pay off a loan, while at the same time pay for your child’s education. In such cases, you have to prioritise your financial goals and save accordingly.
Set financial goals: A good financial plan lists down the long-term and short-term goals of a person, and this differentiation helps one to understand and predict the future expenditures better. This also enables one to figure out how to plan finances in various time periods. One should review goals each year and check whether these have been achieved and, if not, then how to change the plan to achieve these goals. Some goals could be to have an emergency fund for unexpected expenses, or for a child’s education or marriage, etc. A person should also plan and keep a check on the funds required post-retirement. Retirement is one major time in life when expenses go up but the income stops.
Reduce unnecessary expenditure: Once you prepare a budget, you can see where the various expenses and monthly income go. Take care not to spend on unnecessary items, and curtail impulse buys. It is important for an individual to know one’s own needs and wants as compared to one’s desires, and plan to spend on these two aspects separately after taking into account a monthly budget. Ideally, one should create a monthly budget and keep updating it every time there is a pay raise. Follow this budget strictly. Do keep aside a little money in the budget for discretionary spends. This will give one the money required to make any luxury purchases without putting into jeopardy the corpus for one’s future savings.
Plan your investments: Choosing an investment plan is an important factor in planning your finances. Your money can reap the benefits of compounding only through investments. The decision of which instrument to invest in depends on your financial goals, risk profile, time horizon to meet your goals, etc. For example, if your goal is to send your child abroad for education, it is advisable for you to invest money in a Public Provident Fund (PPF) as it gives tax-free fixed interest rate, principal security and income tax deduction. When looking at equity options, it is advisable to invest through a systematic investment plan (SIP). SIP investments give one the benefits from an up-market as well as a down-market. Investors investing through SIP tend to purchase more units when the market falls and fewer units when the market rises; the average cost per unit declines over a period of time thus being an effective tool for risk management.
Automate investments: It is advisable to invest on a monthly basis (through a systematic investment plan/systematic transfer plan), as this will give one the double benefit of regular investment and compounding as well as negating the possibility of overshooting the budget and hence delaying one’s savings. Ideally, one should automate this process to avoid any last-minute delays in investing or procrastination. Automating the investment process by a direct bank transfer to a mutual fund/recurring deposit/etc., will help in ensuring that the savings objective is met and also curtail the number of impulse spends—keeping you within the budget.
Don’t forget risk cover: It is important to have a risk cover in place—life, medical, auto, home are the important ones to cover. This is to ensure that one’s family is taken care of in the case of any unforeseen event.
Have a contingency fund: It is advisable to save money in a contingent/emergency fund. This money should be used only in the case of an emergency. For example, if say you lose your job and have to pay your EMIs for loans, etc., then you can use the contingent fund to make payments until you get placed in a new job. It is very important to note that this money should be maintained as a separate account, aside of the usual savings and investments accounts.
Take tax breaks: Saving tax is one of the most important aspects of financial planning, and there are several tax-saving methods, ranging from the most often used 80C under which one can save # 1.5 lakh in various instruments such as PPF, insurance, ELSS, certain FDs, etc. There are also several other tax-saving investments such as medical expenses of dependants, housing rent, contribution to political parties, capital losses, etc.
Start investing early: One should start investing as early as possible to reap the benefits of compounding. Choose an investment plan which yields the highest potential for growth at as low a risk as possible. It is advisable for you to invest in mutual funds through Systematic Investment plans. Since a Systematic Investment Plan (SIP) ensures that one doesn’t need to time the market, the investment in SIP takes place each month irrespective of the market condition. Thus, investors can benefit from both an up-market and a down-market. It is advisable to remain invested through SIPs for as long as possible, as investors can benefit from the power of compounding. An investor putting in # 1,000 per month through a SIP will have over # 18 lakh in 30 years (assuming a return of nine per cent pa) thanks to the power of compounding.
