When it comes to personal finance, you need to cultivate some good habits in order to be above average
You don’t have to be a pro in handling money, just follow these five money habits that everyone can learn to stay ahead when it comes to financial management.
1. Learn when to use loans properly
Not all loans are bad. Those who used the loan smartly will make sure they use it to generate higher returns. In the end, the returns they received from using the loan will not only pay for the loan, but will also generate higher value.
For example, you take on a loan to buy a mobile phone. That is an example of a bad loan, as a mobile phone is a depreciating item, instead of an asset.
But let’s say you take a personal loan to grow your business. This makes it a good debt as the loan is used to improve your business net worth. Good debt can also be characterised as below:
- Increases and adds to your net worth
- Helps your money grow
- Affordable repayment
- Low interest
Therefore, it is important to understand the concept of leveraging, because a loan can be a good debt if you learn to use the loan to generate return at a lowest cost.
2. Pursue income growth
Let’s face it, there is only so much you can save from your monthly income.
For example, if your monthly salary is RM3,000, and you have to spend a fixed RM500 on your basic necessities. This means you won’t be able to afford to save more than RM2,500 every month.
So for most people, having a full-time job will not lead to wealth, but it is more about stability in generating income. The individuals who do become affluent are the ones who are actively pursuing growth in their existing income.
Here’s a simple guideline you can follow:
Make it a habit to actively grow your monthly income by 10% every year.
Let’s say your current salary is RM3,000. Aim to have your monthly income increase to RM3,300 next year. It may be easier said than done, but you should at least have an initiative to grow your income.
This can be done by earning a side income on top of your monthly income, or improve your skills then negotiate with your employer for a salary raise.
3. Practice the 5% rule
When it comes to investing, make sure you practice the 5% rule.
This rule states that 5% of your investment portfolio should be channeled into an alternative investment. Essentially, what you are striving for is a balanced portfolio of low and high risk investments without jeopardising your money.
For example, you can opt to put 5% into a riskier investment fund where you can get 7% per annum.
This way, your investment will be balanced between the low returns of your safe assets. Yet even if your high-risk investments go wrong, it won’t cause too much damage, because remember, you’ve limited it to only make up 5% of your investments.
4. Spend cautiously
This is an oldie, but a goodie.
It is a money habit that you must have if you are serious about growing your wealth. In order to make sure your finances are not only in order, but you are ahead of the game, you need to pay attention to the small details too.
For example, consider the people who spend money on gym memberships, but then never go.
Likewise, there are people who spend more than they have to on the home loan (they don’t refinance even if a cheaper deal is on the market), or buy expensive coffee when a cheaper, equally good cup is right across the street.
This is buying due to novelty or convenience, rather than actual desire. In the above example, we may buy expensive coffee not because we savour that brand, but just because it’s in the same office building.
The financially successful cultivate a high resistance to this behaviour. It’s not that they don’t spend – they’re just careful to direct their spending toward things that truly satisfy them.
5. Avoid analysis paralysis
Sometimes when you think too much about something, in the end you won’t get around to do anything.
In order to be financially successful, one needs to take action. Sure, a financial decision will require more research before a decision is made. However, there are those who do not come to a decision even after all the research has been done.
For example, you are thinking of buying your first home, but you are unsure if it is the right time to do so.
A financially savvy person will set a date by which they will decide to buy or decide not to. By doing so, they will avoid analysis paralysis, which is a situation when there are many options, and one learns what all options entail, but ends up not taking any action.
You must know, and set a time to stop looking around.
Give yourself deadlines for example, when you should make a decision, and under what conditions. Then follow through with your action, because if you don’t do this, you may not do so and you won’t grow your wealth.
This article first appeared on CompareHero.my