Financial Habits

Now that we have set aside a major portion of our wealth for emergencies in the form of Contingency fund or Emergency fund. Let us discuss a few financial habits that everyone should follow in order to achieve any financial goals: 

What are the financial habits, or the lack of them, that have brought us to our current level of financial health? 

When you sit down to assess yourself, it is all really about only two things: 

1. Are you living ‘within’ your means or 'below’ your means? 

By this we mean, is your level of saving the level that you require, or do you save that little bit extra and – invest it?

2. What do you spend on and how much do you invest? 

This means, is your expenditure primarily on luxuries or necessities? Accordingly, are you investing as much as you can or are you spending the cash that could have been invested instead? 

These two important factors will determine whether you will be able to send your child to that excellent school, or buy the more beautiful house, drive the bigger car, take the longer vacations and retire those few years earlier. These are all financial goals. As we advance in this module, we will discuss the importance of financial goals and the steps to achieve them. 

As of now, we have to focus on four important financial heads -

Money tends to flow between the above heads.

Our income will fund our expenses and will take care of the full or part purchase of any assets we may buy. Part purchase of assets can be supported by taking on liabilities. Our liability payments are in turn again funded by our income. Keeping track of this money flow is called budgeting. We will study the concept of budgeting and understand its necessity in the next section.