Surprisingly, some of the fundamental dos and don’ts in personal finance are really never new. Those were the principles your grand fathers and great grand fathers were practicing in their ages. The only difference was that there was not so much of consumerism those days; there were not so many of truly-unnecessary-but-highly-ensnaring products and gadgets in the market and the curse of the credit card culture was non-existent.
Unfortunately, for the present day spendthrifts who want instant gratification through un-owned money , those age-old fundamentals of sound personal finance practices may sound bland and boring . But only experience will tell you that olden wisdom is always aimed at giving long lasting peace than enjoying short-spanned thrills in life.
(1) Live within your means
It simply means: let your regular expenses be well within your regular income. It amounts to saying that let your desires, needs and ambitions be restricted in proportion to your income; let your lifestyle be in tune with your current earnings and not in comparison with your neighbor, colleague or a peer.
(2) Save a percentage of your income
There is a saying: Let your first expenditure be a saving. While we go about happily with undisciplined spending, we normally find it difficult to do disciplined saving. Saving should become a commitment. The culture of saving should be nurtured in our blood stream.
How much to save? A general guideline is 10% of your income, at the least; The more, the better.
(3) Never enjoy luxury on borrowed money
The toughest rule is never to borrow money, which perhaps might not have been practical for the vast majority even in those days. The relaxed rule is to borrow money only for buying long term assets (like a house).
A further relaxed rule is to borrow money for capital intensive luxuries (like buying a car). But the age old wisdom restricts borrowing to cover only that much of money which you can’t pump in from your savings. The idea is that your debts should be minimal and well within your capacity to repay without much of sweat. It goes without saying that the choice and model of the vehicle you buy on loans should be what you can afford repay comfortably and not what is prestigious to own.
(4) Invest on assets that appreciate faster or that have higher security value
An investment on a piece of land has more scope of appreciation and has higher security value than company shares. Investment in gold may not have faster appreciation but has a sound security value.
Extending this principle to today’s context, your great grand father would not approve of investing money in an apartment; he would rather prefer to buy an independent house on a plot of land, even if it is quite farther away in a suburb with much reduced plinth area.
(5) Distribute investments more in low-risk low-return avenues and less on high-risk, high-return avenues
The olden wisdom was always more in favor of security, stability and less on speculation and risk. Long term, slow growth was given a lot more weightage over short-term high growth.
(6) Where income is limited, do not own what you can hire
Be it a house or a car – unless you can safely repay the money you borrow without cutting too much of corners on the luxuries that you are comfortably enjoying today within your current means, it is not advisable to go for ownership.
(7) Write your personal accounts; avoid unplanned, impulsive purchases.
Every house-holder is supposed to write their daily expenditure accounts; Budgeting is a mandatory discipline. Impulsive and unplanned purchases are to be meticulously avoided.
We can definitely “borrow” such a few good things from the past generation about managing our personal finance. Olden values were built on one watchword – integrity. Your honesty and integrity get subjected to maximum trials and tribulations if you borrow beyond your means. Becoming bankrupt was tantamount to walking naked on the street in olden days. If only we can follow a few of these guidelines, we can be free from the burden of debts and can ever be indebted to our fore fathers for their practical wisdom.