We live in a world of financial interdependence among each other. As a child, we were surrounded by parents and relatives who tend to save money by buying property, buying gold, etc. The kids start to learn how their parents spend money, save money, and with the saved money, the parents try to educate the kids. The kids, after completing their education, move forward in life and start to earn. They move from financial interdependence to financial independence. The whole journey takes a long time. As a part of financial prudence, there are some key factors that we want to take back from our parents and relatives on how they managed money.
We should be disciplined both for health and wealth. As we all know, the people who go to the gym are a very particular set of people. They have a fixed routine that they follow which leads to their great physique. One should be disciplined throughout their life. Similarly in the financial side, we must be disciplined. When we start to earn, we become an asset to the country and no more liability. When we are earning money, we should focus more on investing and saving, and not just spending it irrationally. Life is uncertain. We never know when we are to face a disaster or a mishap. If unfortunately, the breadwinning member of the family dies, then how will the family survive? Hence, it is important to cover the risk, whether it is wealth risk or life risk. This way, we can become secure. We must save. We should save at least 30-35% of our income. Saving includes home loans, savings for retirement, savings for a child’s higher education, etc. After all the savings, whatever amount is left, we spend that money on our basic needs and requirements. But unfortunately, today’s generation focuses more on spending than on saving. They keep spending on luxuries, keeping their future aside. According to financial prudence, we must save first and then spend. Hence people should be more disciplined.
Don’t put all eggs in one basket. It is a very old school thought. We should not put all our money in one particular account. If we have all our money in one account and unfortunately, that bank collapses, we won’t be able to recover from our loss. Hence, we should divide our savings into various accounts. It is also known as concentration risk in financial parlance. It means if all your money is in a single particular product, then you have a very high concentration risk as your money is concentrated in just one idea. For example, if I am investing all my money in the stock market and unfortunately, it crashes, then I’ll lose all my money. If all my money is scattered into different accounts, then the probability of loss will decrease. Hence don’t put all eggs in one basket ever. But, diversify risks.
As a sequence, we should save first and spend it later. Similar to the financial cycle, first of all, save money, then spend the remaining one. But today’s generation prefers to spend first which leads to no savings. Hence we should save more as the future is uncertain. Savings always helps us to meet any unforeseen situation or eventuality.
Power of Compounding is the phenomenon by which we make returns on returns. For example, I am getting a return of 10%. If I invest that money in a deposit for 20 years, the return component will be remarkably high. Every year passing by, we will make more and more returns. The incremental will increase every year. People become rich by just using the power of compounding. Hence, the Power of compounding is the wonder of the world and should always be used more.
Small savings over a long time yield great financial independence. As we know that the longest journey starts with a single step. Similarly, for example, if we earn Rs. 100, we should save some part of it, say, Rs.10. We should not wait for the time when we’ll earn more, to save. We should start early instead of starting late. We can look up to our mother, sisters, and other female relatives as, generally, women are better money managers than men. Women understand the savings culture much better than men.
Also, don’t be an impulsive spender. Plan your spending rationally. Don’t be impulsive while spending the money. If there’s a particular need which addresses that purchase, then only make the purchase. Otherwise, focus more on the saving part.
Hence, we can learn all this financial sense from our elders.