Higher Income ≠ No Money Problems

More money may always seem like a one-stop solution to ending financial misery and building wealth. But, we think what you do with your money makes all the difference.

Telling you to make more money instead of saving more, or saving in the right way, is like telling you to dream big without establishing a route to get there. Many people can barely get by every month, irrespective of how much they earn.

This is mainly because people take financial discipline for granted, with the assumption that earning ‘big money’ is good enough to ensure security and adequate returns.

Although expenditure increases simultaneously with increase in income, saving habits also need to change in tandem. People who do not indulge in regular assessment of their spending and saving habits typically find it challenging to resolve money problems despite high incomes.

Here are a few behaviours we have identified as hurdles to achieving your financial dream.

No goals in place

Not having a goal in place is as good as not knowing what to do with the money in hand. Setting an appropriate goal can be the first step towards achieving your financial goals and building a suitable fund. For example, if you have a plan to buy a house after 5 years, you should figure out the type and size of the property right now and estimate the upcoming expenses to prepare yourself well. For example, if the type of house you are looking at will be worth Rs. 5 crore in the next five years, and you only have the capacity to shell out Rs. 2 crore, you should start planning on arranging for funds before it gets too late.

Instead of believing that you can accomplish everything in life by living paycheck-to-paycheck, we suggest you have a consistent and goal-oriented investment plan going. Inflation erodes the value of money over a period of time, so with the right kind of investment plan in place your money will keep growing, which in turn will help you beat inflation.

With every increase in your income, we suggest you assess and reallocate your investment assets regularly, and apply the power of compounding to multiply your money over a period of time.

Uncontrolled expenditure

Is your house stacked up with unnecessary things? Do your bills consist of bundled services which are renewed every month even though you don’t need them at all? If yes, your spending habits clearly need monitoring. Extravagance won’t just trim your investment potential but will also lead to debts.

We suggest you take a look at your monthly budget and strike off all items that are non-essential. Make any necessary changes to service plans, or scrap them all together if they are found to be of no use. Also, look for ways to reduce spending on utilities. Judicious planning can walk you through any financial difficulties and help you build wealth.

Ineffective tax planning

Tax efficiency is a measure of how much an investor is left with after taxes are paid from his returns. A lot of people lose out on hard-earned cash due to the tax burden placed on them, not just through consumption, but also through savings and investment. It’s important that you invest in the right tax-saving instruments in order to tackle inflation better and to ensure high returns. You can maximize on investment earnings and stay out of a higher tax bracket by choosing effective investment tools that offer the lowest tax burden relative to the interest or dividend income. Also, look out for as many deductions as allowed under the Income Tax Act.

Debt management

Clearing off loans is a crucial part of money management. The sooner you pay off your debts, the sooner you will be setting yourself free from financial burdens. Sometimes people skip loan payments despite a steady flow of income, thinking that they can close out the loan through a one-time payment at some point in time. Such practices lead to high outstanding debt, which can also negatively affect your Credit Score. Loans and debts multiply over a period of time leading to an unmanageable money crisis.

To cut a long story short, instead of focusing on one side of the equation, we suggest you look at both sides. Having a high income makes it easy to achieve all the things you want but not without discipline and smart planning in terms of expenditure, investment and debt management.

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