Answer These Five Questions To Get On The Right Financial Track

Think about what products you could buy for Rs. 500 ten years back, and you will realise that you can not buy even half of those products for Rs. 500 now. This is the effect of inflation, which increases the overall prices of products and services over time. Since it is a common practice to get a salary hike every year or increase the price of products or services in case of self-employed to factor in the inflation rate, it becomes vital to start saving for the future. After you retire or stop working, you will lose your primary source of income and rely on your lifelong savings. However, there is a high possibility that you will have to spend more on the same things in the future, making it crucial to be on the right financial track in the present.

This blog will serve as a fact check by asking five important finance questions that will help you cross-check your current financial situation and determine whether you are taking the right steps to secure your financial future. 

• Financial health refers to the state of your personal finances, including savings, debt management, and the ability to meet future financial goals.
• Financial health is essential for stability, ensuring you can manage expenses, handle emergencies, and achieve long-term financial goals.
• It is vital to be on the right financial track to avoid a financial burden and ensure you have an adequate amount in the future. 

Here are the five finance questions to allow you to be on the right track of financial freedom:

Question 1: What are my financial goals

You must clearly determine your short-term, medium-term, and long-term goals. Identify the short-term goals you want to achieve in the next 1-3 years, such as building an emergency fund, saving for a vacation, or paying off small debts. Medium-term goals are for the next 3-5 years, including buying a car, funding education, or saving for a home down payment. Long-term goals are for 5+ years or more and are targeted towards retirement and having an adequate amount in the absence of the primary source of income. You must save to achieve these goals.

Question 2: What is my current financial situation

You must know everything about your current financial situation. Analyse your income sources (salary, business) and monthly expenses (fixed and variable). This will help you understand your cash inflow and outflow and identify areas to cut costs. Calculate your assets (savings, investments, property) minus liabilities (debts, loans) to determine your net worth. This provides a clear picture of your overall financial health. If you feel that your net worth is lower than it should be, try to save more and reduce your liabilities.

Question 3: How much debt do I have

Debt can be a good thing to avoid covering high expenses from your savings or to have high liquidity. However, having debt higher than what you repay can negatively affect your financial health. List all your debts, including credit cards, loans, and mortgages, along with their interest rates and monthly payments, and review how much you are spending on repaying them. Consider taking a debt consolidation loan to pay off multiple loans through a single loan and avoid further debt.

Question 4: Am I investing a portion of my savings

Piling cash in the savings account is never a good option as savings accounts provide one of the lowest interest rates among every financial instrument. It is vital that you invest a major portion of your savings into various market-linked and fixed-income investment instruments. Although market-linked instruments such as stocks come with high associated risk, they offer high return potential. On the other hand, fixed-income instruments are low-risk and offer steady income.

Question 5: Am I saving enough for emergencies and retirement

You may invest or save as much as you can, but the target amount should be based on determining your financial goals and adjusting for inflation. You must keep a portion of your savings as an emergency fund, which you can access quickly in case of financial emergencies without having to take credit. The remaining savings amount must be invested to build wealth for retirement. Consider the types of investments that align with your risk tolerance and time horizon for retirement. Diversifying your portfolio can help maximise returns and minimise risks.

Creating a comprehensive financial plan is the core of being on the right financial track and attaining financial freedom. By thoughtfully answering the above five financial questions, you can gain clarity on your financial situation, set realistic goals, and develop actionable plans to achieve them, ultimately leading to a more secure financial future.

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