Personal Finance Habits to Inculcate for a Debt-free living


The effects of sensible financial habits can be observed and felt throughout a life cycle, more so, during crises situations that offer life-altering insights into the role of personal finances in overall well-being of individuals, their dependents and households. There are proven ways to manage personal finances effectively and it is ideal to begin practicing a set course when one joins the work-force. However, it is never too late to begin; the key is your realisation to manage finances differently and your drive to initiate and stick to the effective way for life, for wealth creation and debt free living.

Follow these key steps that will help you in building financial security.

1. Financial Goal-Setting

Setting the right goals is critical in deciding one’s priorities, investing in them adequately, staying focused on the path and not losing sight of things one values most in life. Key questions to ask are: Where do I want to reach financially by certain age? What should be my priorities that will help me reach there? What are my responsibilities within family and financial liabilities (present and future projection eg child’s education, medical costs, marriage of children, meeting expenses post retirement etc)?

2. Investing finance in identified priority areas

The next key step after identifying one’s priorities and staying committed to them is the task of adequately allocating resources from one’s income and savings into these priority areas and investing through various instruments particularly, growth oriented mutual funds where investment horizon is long, and short-term investment products where requirement for liquidity is immediate or in near future. This approach improves prospects of returns with respect to building a retirement corpus and managing rising living costs due to inflation.

Further, the investments must be tracked annually to do away with underperforming investments to keep the portfolio healthy. Similarly, there must be an exit plan for high performing equity investments and the purpose should be to redeem when one is nearing the investment maturation timeline so that it is a profitable end and the fund is also safe. Building a corpus for emergencies (such as illness, job loss or any other unforeseen situation) must be part of healthy financial habit with allocation worth at least 6 months’ of income.

3. Buying adequate insurance cover

Getting oneself and family suitably covered under a health insurance product eg family floater plan and Critical Illness cover and Life Insurance (for the main earner) are essential costs that must not be compromised with. In health emergencies, insurance is the best self-help investment that can reduce financial woes by sharing the burden. Similarly, a vehicle insurance policy takes care of the expenditure in fixing an asset in case of accidents.

4. Building an understanding of Income Tax Rules

All taxpayers must keep themselves updated with the Income tax rules so that they act lawfully, are aware of tax deductions and could avail benefits of tax exemptions on various products (like health insurance, market linked investments, PPFs, FDs etc), loans (such as interest deduction for low-cost housing loans) or full tax rebate under an IT slab if applicable. Even if one files the tax returns with some assistance, for the purpose of organising documents as the basis for filing returns, being informed and proactive helps in staying in charge of one’s finances and ensuring correct reflection in the returns filed.˝

5. Budget planning and Implementation

Segregate your monthly income into essential, disciplined investment and discretionary spending whereby no more than 20 percent of the income goes into discretionary spending. Maintain a spending logbook and retain all the bills at least until you input the information into the spending logbook. It might also help to have a planner to remind you of periodic financial commitment for investments such as health insurance premium and other purposes such as maintenance of cars, servicing of ACs, invertors etc as well as for vacations. Maintenance, servicing, and repairs of assets are important areas that must be factored into the budget. Overspending on discretionary items should be avoided even if is tied to earning reward points. Upcycling is another idea worth exploring instead of discarding reusable, old household items such as furniture and it might be your contribution in reducing the pressure on landfills.

6. Using credit and loans wisely

Taking a loan or purchasing an item on credit may be needed sometimes but one must decide the frequency, compare the terms of payment and choose an option with commonsense. It is in one’s best interest to settle the outstanding amount on credit cards (not only pay the minimum amount due) and regularly pay the loan instalments on time to avoid high interest rate and avoid falling into the trap of indebtedness. Ensuring sufficient fund in bank account and setting autopay option is particularly useful in this regard.

There are several other suggestions to improve one’s financial habits. These include regular tracking of credit score of credit cards (a healthy score helps in availing loan), consolidating number of bank accounts to not more than 2-3 (where one account is dedicated for debit card purchases such as groceries, transaction over e-commerce websites, mobile recharge, electricity payment and usage at petrol pump stations), limiting the number of credit cards and using a mix of credit and debit cards for transactions. Gaining familiarity over and using net banking facility is also highly recommended as the digital option has empowered us in our daily functioning and handling of money digitally.

Implementing these financial habits would soon begin to show results, build your self-reliance, motivate you to stay on this path of financial prudence and help you deal better with life in all seasons.

Need to talk to a Debt Counsellor?
Have more questions? Call us at