Good Financial Habits are the Key to Wealth Creation

Let me elaborate on some of the activities that fall under this scope and which require very little technical knowledge or expertise in finance.

Get used to paying yourself first. It is a concept in which whatever one earns on a monthly basis, he should save a small amount i.e. pay himself before he pays himself – like landlord, maids, household bills, entertainment etc. This simple act of saving over a period of time has the power to build a sizable corpus to sustain itself during the retirement years.

Habit of avoiding the debt trap. This suggests that one should live within one’s means and no purchase should be financed through loans in such a way as to threaten one’s financial well-being in future. An important point to note here is the rate of interest at which the loan is taken and the quantum of loan itself. One consequence of this habit is the habit of repaying the existing debt every month.

Some loans like home loans are inevitable, as it is also an emotional decision. However, one must have a strategy to repay some amount of debt, at least on an annual basis. This can be achieved for example by using one’s annual bonus. In a low interest rate environment, it can be tempting to take on more debt but as the cycle turns, the debt can become unmanageable.

The habit of not putting all your eggs in one basket. The technical term for this age-old knowledge is called diversification. This means investing in different asset classes with a view to controlling risk. It also automatically ensures that an investor is not looking for maximum returns, which often leads to over-allocation to a particular asset class which may be the latest fad. However, I would take it a step further and diversify not only between asset classes, but wherever possible, taking into account related expenses and taxes. For example, if you’re looking at equities, look to diversify between different styles, market caps, etc. A mixed portfolio that contains a mix of all of these strategies can also be seen for core allocation.

The habit of reducing impulse purchases. By this I am not suggesting that we all lead very frugal lifestyles. To understand this properly, consider your own income and lifestyle changes over the years. Our expenses would have almost magically increased to match our income over the years, leaving us with a lower savings rate despite rising incomes.

This happens mainly because we confuse necessary expenses with our desires. It is a very difficult habit to create and maintain as there is a lot of peer pressure and we benchmark ourselves to the society at large, but this habit has maximum scope and potential to provide financial freedom.

Good company habit. You rely on your family more than others for support in life, because they understand you better than anyone else. So, in a way, they are your “emotional experts.” Similarly, for every aspect of life we ​​need true experts. Benefits of having yourself with you

Experts who can provide financial advice in a transparent and competent manner cannot be overemphasized. It may seem like an unnecessary expense when going well, but like family, the true value of an expert comes to the fore during life’s down periods.

As I conclude, I should point out that none of the above habits require any domain expertise. But equally important is to enjoy life, indulge from time to time, be flexible about your plans, and be open to ideas. The combination of a healthy mind and body is in itself the biggest wealth maker.

Ajit Menon is the Chief Executive Officer of PGIM India Mutual Fund.