- Save 10% of your income every month for retirement.
- Build an emergency fund of up to three months of your salary.
- Keep a list of things to buy before going to the mall and stick to it.
We have heard or read these wise words. They are all valuable words of advice. But do they always work? Is it possible to follow them? Unfortunately not! Different people have different situations at various times. Here are some cases when it may not be possible to follow traditional personal advice -
Many people are freelancers. They do not have a regular income. Many of us cannot expect to have steady jobs like the ones our parents/grandparents had. We change roles, jobs, and locations. Some of us take a sabbatical, and others try to start our own business. Some of us lose jobs too. These factors contribute to income volatility. In such cases, it is difficult to follow traditional personal finance advice. For example, if you start a business, it might be challenging to contribute to the retirement fund regularly for some time. If you are a freelancer, you might have to dip into your savings to pay off bills when there is a dearth of projects. Consider your situation and follow advice accordingly. For example, if you get a higher income in a couple of months due to a high-paying client or more projects than usual, contribute a higher amount to your savings.
Paying Off High-Interest Loans
It is never a good idea to be in debt. You pay more in terms of interest and opportunity loss of missed investments. But it is not always possible to pay off loans. You might have periods where your expenditure is high. Sometimes you get lucrative investment opportunities. If you obtain a higher return on investments than your interest rate, it is better to use the money to invest and earn some returns and then pay off the debt.
Decision on the Conundrum of 'Rent Versus Buy A House'
Most people have a dream of owning their house. This dream costs them money and at the same time, they might be forced to lead a lifestyle below their means. A home is considered as a good investment. It is, of course, prudent to have your own home. It is your own space and you avoid hassles of searching a home intermittently, dealing with landlords, etc. But buying a home is a tough decision. In the Tier 1 cities in India, the rent is much less than the EMI you pay on the housing loan.
For example, in Mumbai, the cost of a newly constructed 1 BHK in Goregaon will be around ₹ 60,00,000. The rent will be approximately ₹ 25,000 per month. If you take a loan for 80% of the amount, with an interest rate of 8.25%, the EMI will work out to 59,000. The EMI is more than double the amount of rent. You will have to maintain a lifestyle such that you can pay off the EMI. It is quite a burden. Are you a person who will live in the same place? Your job might take you places. You may want to live in a different locality. You might want to live in a bigger house or a high-end property at least for some time. You will miss out on this flexibility if you purchase a house. So think of your circumstances and choices and choose the right time before you conform to the financial advice of buying a house.
Many advisors recommend setting aside 10% of your income towards your retirement fund. The amount depends on your lifestyle now and the kind of lifestyle you wish to have in your retirement years. With longer lifespans, decline in the rate of returns on many products and income volatility, you might need to save and invest more. On the other hand, if you plan to live a frugal lifestyle or already have wealth, you might need to save and invest less as there is really no point in outliving your money!
It is critical to have a financial plan in place and follow the tenets of financial wisdom. Do remember to create a plan that is suitable for you now and at the same time will allow you to live comfortably in the future.