Spend Time, Save Money

Know Your Financial Health To Save Money The Right Way

"Rule No. 1 : Never Lose Money. Rule No. 2 : Never Forget Rule No. 1." - Warren Buffett

You will always find a good quote about everything. That's because you will always find someone who travelled in a similar path you are taking. You just need to learn from them.

The global economy has been facing headwinds for some time now. The warning signs were there since 2018, but COVID accelerated it. Given that the businesses are trying to cope-up, revenues flat, hikes and promotions postponed for some, some even losing their jobs, Warren Buffett's quote makes more sense than ever. Either we are already impacted, or we may or may not even be impacted at all. In any case, it’s an uncertainty and we should always take precautions when times are uncertain. An unexpected crisis should not knock us out of our depth, making us play catch-up for the rest of our life.

Saving money is the most important thing to do while we come out of a crisis. How much to spend, save & invest depends on each one's financial health, but knowing about each person’s capacity is important nonetheless. Knowing about our financial health is altogether a separate topic and we will cover it in another article. In brief, it helps us understand if we have enough cash flow to wade through periods of crisis with limited mental distress.

Your Finance Has A Health Too

Now these questions are some that you should try finding answers for.

1. Have you ever evaluated your financial health before?

2. How often do you evaluate?

3. How recently did you evaluate?

4. Have you understood where your money is leaking?

5. Have you taken steps to plug the leak?

If you haven't asked yourself these questions, it's high time you did. You would be astonished to know that the majority of people have never asked these questions to themselves. Well, if you haven’t, buckle up!

This is not a one time activity, but it's a process that repeats. Everyone's financial goals are to improve their living standards. So, as and when our financial milestones are met, we need to do this activity to account for all the changes that happened in our purchasing power and financial commitments.

A common mistake that people make is, skipping the first three questions and working on the last two. That’s totally counter-intuitive. Without understanding what our net worth is, we cannot effectively manage money. If there is sufficient funds to deploy, yet we remain conservative, we are missing out on improving our financial health. On the contrary, If we have no cushion and spend beyond our power or invest recklessly, we are inviting a disaster.

Figure Out Where You Are In The Financial Pyramid

Until we find out where we fit in, we cannot do money management. For example, when managing funds, we allocate under 3 broad categories, liquid funds, safer funds and riskier funds. Depending on where we are in the pyramid, our exposure to each category will vary.

Leakage in liquid funds through day to day expenses catches our eyes easily, just because of the fact that we are on top of what goes in and out of our wallet (cash, cards and digital payments). And it's the basic instinct of humans to go after the easy targets and this is applicable to our "Cost Cutting" mode during times of uncertainty. We tend to cut down these "Unnecessary" expenses and claim our targets as achieved. Though occurrences of leakage in liquid funds may be numerous, the sum of all such leakage generally tends to be much lower than the leakage that occurs on our riskier assets such as equity, mutual funds etc. This leakage tends to hit us hard and quick compared to the leakage from our wallet which is soft and slow.

Penny Wise Pound Foolish

Yes, it is required to cut down on unnecessary expenditure, but that doesn't take priority over stopping losses on our riskier assets. It hurts us more in the short term and limits your long term prospects. This truth is always hidden under plain sight. Let's face it, we are not going to make up for that money by tightening our wallet. Instead, we should take a look at our riskier portfolio, let the losses sink in and take action. Re-plan your fund allocation and do what it takes to stop losing money more than what you could take. If your exposure to riskier assets is significantly lower, then you are in luck. You might even have enough room to take little risk, but not for those whose exposure is beyond their comfort zone.

More importantly, it’s time to have additional buffer in the liquid fund type to cover for emergencies and contingencies until you have good income security. Saving on our daily expenditure is the last priority. You will find enough time to play catch-up on it, but not on the riskier funds. If you get confused or get stuck while figuring out your financial health, reach out to an authorized financial adviser. Time is not ripe for taking risks, there is always another day.

It’s never too late.

Take-Away: Spend time In Saving Riskier Money

#FinancialHealth #SaveMoney