Know your financial tipping point

I find managing money so much like managing one's weight! Wouldn't you agree that managing both is so difficult for most people? Ever so often, almost everybody around you is trying to lose weight and it's a very small percentage that actually manages to show some results. Similarly, with managing money, despite knowing that one needs to save for the future, beat inflation, etc, probably less than 1% people actually have a financial plan. It's got to do with two things:

(1) The goal is not SMART – I want to be thin or rich are goals, but not specific or realistic

(2) Due to the journey to the goals being difficult to implement (in case of weight loss) and understand (in case of managing money), most people get frustrated and lose the incentive to reach their goal. In fact, one becomes complacent and ends up accepting one's situation.

Even knowing your target weight or how much money makes you feel rich will not lead you to working towards it, because you don't have an incentive or a push to do so. Maybe because one feels one has the time and more importantly because there is no tipping point that is getting you to do this. In my experience as a financial educator, even with all the information available, unless there is a tipping point, people do not take serious action on their investments.

Tipping point is the threshold at which one starts to make small changes, which have a big impact. Tipping points are typically driven by negative news – for example, your health check results show onset of diabetes or cholesterol related issues or in case of personal finance, you have a sudden emergency and realise that you don't have enough to fund the requirement. Or you want to leave your boring corporate job, but figure out that you don't have enough to sustain yourself.

However, once you reach the tipping point, you need to have a lot of patience and remember things don't come easy. You need to take small steps, which you are comfortable with in the long run. I have seen so many people giving up rice and sugar in reaction to their tipping point, or suddenly cutting down on regular lifestyle expenses. These drastic measures are not sustainable in the long term and only cause more frustration.

The first steps towards managing money better would be making some little things that can make a big difference and these are:

a) Review your spending and take a vow to save at least 30% of your take home family income

b) Pay of toxic loans like personal loans and credit card loans which not only are very expensive but also do nothing to improve your credit score

Now that you are saving more, you need to ask yourself, "How much is enough?" Is just saving for key financial goals like children's education or retirement sufficient or does one want to achieve financial freedom, that is, have enough assets that are used to live on and grow at the same time, so that you can live your life the way you want to. It's akin to figuring out if one wants to be healthy or thin.

Good things take time to happen and money will come when you are doing the right thing. But first you need to get to the tipping point!

The writer is director Finsafe India and co-founder, Womantra