A good personal finance practice is with people who meet their regular commitments including current living expenses, debt servicing and then generate surplus and use them for creating assets in various forms for their use in the future.
Those people who are not able to get these 3 things happen (meeting expenses, debt services and creating assets in various forms), need to understand the importance of savings and investments.
People can say that only those who earn substantially can do this. Whether people earn Rs. 10,000/- per month or Rs. 10,00,000/- per month, it does not matter. They should maintain their life style in such a way that their expenses are well within their means and it also does not matter whether they are able to save Rs. 500/- per month or Rs. 5,00,000/- per month.
Irrespective of the amount one can save, the habit of savings is very important.
The more you practice this habit and the longer the practice is, higher will be the outcome in terms of financial resources / wealth. If you are able to save ₹ 500/- per month out of their income of ₹ 10,000/- , then the habit will itself increase their savings, as and when their income goes up.
People who do not have the habit of savings in spite of their higher income, will end up spending more on various luxuries whenever there is a hike and wealth creation will never happen.
To ensure that the people are able to maintain the 4 pillars of personal finance in order, following a simple financial discipline shall help.
- Spend less than your earnings
- Budget your expenses
- Develop habit of saving, because how much you save is more important than how much you earn
- Create an emergency fund
- Understand the difference between savings and investments
Let me explain more on the Principles of Money Management in my upcoming post.