Wednesday, June 5, 2013

Can High Income Guarantee You Financial Security?

Do you always struggle to pay your bills towards the end of the month despite earning decent money? If yes, then you need to keep a check on your spending habits. It's a common notion that higher income is the key to one's financial success. Many of us believe that jobs paying lucrative packages and providing thriving opportunities are a pre-requisite to secure our financial future. But we often forget that money doesn't beget money on its own; it's us who can make money work for us. Before we discuss this further, we need to understand what may spoil your financial future despite of you earning high income.

What should you be careful of?

  • Excessive spending would leave lesser amount in your hands for investment
  • Excessive debt would always eat into your earnings eroding your surplus
  • Poor utilisation of your surplus may reduce your chances of earning attractive returns on your investments

High income and lesser responsibilities may entice people to spend excessively on their lifestyle related expenses and splurge money on recreation without even giving a second thought. One might be getting a good hike in income every year; but may pile up huge debt being extra-optimistic about future rise in income. Some of you who may have lesser debt but ineffective investment plans may still generate lower returns on their investments. This may eventually lower your chances of generating wealth that you may otherwise have generating have had you invest in winning investment propositions.

What should you do to make your money work for you?

  • Avoid impulsive buying
  • Plan and monitor monthly expenses
  • Make effective use of credit cards
  • Avoid excessive borrowing
  • Make a list of your goals
  • Forecast amount you need to achieve your goals
  • Prepare an effective investment plan
  • Monitor and revisit your plan at regular intervals to make it more effective

Many of us spend first and invest later but it should rather be the other way round. You should spend on your lifestyle and other recreation activities only after investing an ascertained amount every month. Habit of investing systematically helps you grow your investments which can be utilised for achieving your goals in future. It is important to estimate amount you may require to achieve your goals in future. You should try to first predict as to how much money you may need if a particular goal was to be satisfied today. Using appropriate rate of inflation you may arrive at the amount you might require in future to satisfy the same life goal. For Example, if you have 15 years left in your retirement; you must first forecast how much money you may need every month post- retirement if you were to retire today and try to estimate how much money you would need every month after you hang up your boots. For planning your finances you might take professional help. Once the amount needed for fulfillment of goal(s) is ascertained you may chalk out a suitable investment plan. You must know your risk appetite before investing in any asset. Right asset allocation and timely monitoring is the most important part of any investment plan.

PersonalFN is of the view that merely earning high income doesn't ensure fulfillment of all your life goals. Although high income increases your chances of attaining your financial goals comfortably; it may not help if you make poor utilisation of your financial resources. Financial discipline is crucial and starting early is a key. 
Source :.personalfn

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