Five tips for financial stability

by Shevon Perera

A friend of mine, Frank had accumulated more than a million rupees in debt by the time he was just 21. The figure kept rising with the passing of each day due to the high interest. One day Frank decided to do something about it. Within two years he settled all his debts and went on to save his first million within the next year. How did he manage to do it?

It's easy for one to get into debt nowadays. We unconsciously get into debt by trying to obtain a lifestyle that we simply haven't earned.

Debt can break families, ruin careers and even cause health problems. This is why its very important that you stay financially stable.

Here are five tips to guide you in the right direction:

Maintain a monthly budget

Running your personal finances is the same as running the finances of a company or even a country. The most important thing is to maintain a budget. This should be done at the beginning of each month.

Write down a realistic list of your monthly expenses. eg: groceries, transport and bills. Leave some room for unforeseen expenses itemised as 'Miscellaneous'. Do a comparison of your projected monthly expenses against your monthly cash inflow. Maintain a 20 percent margin between your expenses and your income at the time of writing down the budget because chances are that you might sustain unforeseen expenses. This is due to the fact that we always tend to underestimate our expenses.

If your initial budget reveals that your expenses are more than 80 percent of your income, start cutting and get it down to 80 percent. This will be the monthly budget that you have to try and stick to. Items that you could cut and chop from are generally groceries, fuel/travelling and entertainment. Reduce eating from take outs and cook your meals at home. Also try and reduce unnecessary travel expenses.

Don't abuse credit cards

When you don't have a credit card you would always think twice before buying something. However, if you have a credit card you no longer have any barriers. Consequently you will end up buying things that you might not even need at all.

If you follow the first tip of maintaining a budget you will definitely save up enough to buy what you want without getting into debt.

Don't obtain loans - unless its to build a house or to buy a car

It is okay to obtain a loan for a solid and purposeful investment. One such investment is buying a house. Be mindful to make a calculated decision when obtaining a house loan. Make sure your instalment is within your earning capacity. Don't go for personal loans. Save up if you want to buy a big screen TV or new furniture. You can actually save up this amount in just matter of months if you plan properly. The interest rate on personal loans nowadays is over 23 percent per year.

Save

The friend I spoke of earlier, Frank told me a few years ago that his new year resolution for that year was to be debt free and to save up a million rupees. Naturally I thought it would be just like anybody else's new year resolution where you forget all about it in less than a week.

However, my friend had the discipline to stick to the resolution he had made. He started budgeting his expenses through a simple income/expense sheet. At the end of February, Frank was shocked to see that he had been able to save Rs. 40,000. By the end of April thanks to a small bonus from his office he had reached Rs. 200,000. This went on for a few months.

Frank even started having cuts on his own budget by eliminating most of his unnecessary expenses. Mind you, he still ate good food, dressed well and took a planned vacation with his wife in August that year.

At the end of the year Frank had hit his target. He and his wife had a joint sum of one million Rupees saved in their accounts. He went to his credit card company and paid off his due amount.

To Frank, being out of debt and a million rupees in savings seemed so far fetched, I'm sure its the same for you right now. But once he got going it all seemed to make sense.

5. Give generously

Make it a point to do your part for the less fortunate. Give generously. While doing so you will encounter so many people who do not get to even enjoy the most basic of needs in life such as clothes, education or even a good meal. Meeting such people will constantly remind you of how blessed you actually are. This will make you value your money more and curb your unnecessary expenses.

The writer is the former Commercial Officer of the Britsih High Commission