Ravi and Mahesh are two friends drawing the same salary every month. They both want to purchase a luxury sedan which costs Rs15 lakhs. Ravi can afford it, but Mahesh can’t. What could be the reason?
Here, the concept of affordability comes into the picture.
Affordability means a person’s ability to pay. Since Ravi has affordability, he doesn’t find the price of the sedan high. On the contrary, Mahesh finds the price high because he can’t afford it.
Let’s understand how affordability is related to personal finance and how you can manage it.
The amount you earn every month contributes to your regular source of income. This income could be salary, profits from business, returns on stock investments, rent from property, etc. It would help if you always looked for alternative sources of income.
Higher the income, higher the affordability.
You generate savings when you save a part of the amount from his income. These savings can lay idle in the cash vault or earn a meagre interest in a bank’s savings account. A better alternative would be to put these savings to better use to grow it as per your short, medium and long-term goals.
More the savings, more the affordability.
When you invest savings in a financial instrument, you can earn returns on it and save taxes. These returns and tax savings are additional income. But, you can re-invest this surplus to grow your investment further. You can invest your money in bank fixed deposits, Public Provident Fund (PPF), mutual funds, depository in stock market, etc.
Higher the returns, higher the affordability.
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There are two types of expenses – recurring and non-recurring. Recurring expenses are predictable, and you can plan for them or allocate a budget to them. Non-recurring expenses are usually unpredictable, like medical emergencies, car breakdowns, home repairs, unexpected travel, etc. You can set aside an emergency stash of money every year. Ideally, this stash should be equivalent to three to six months of your salary.
Lower the expenses, higher the affordability.
Loans and Debts
Loans and debts put a financial burden on your pocket and family. The EMIs reduce your monthly earnings. In case of the unfortunate event of your death, your family will have to bear the financial obligations. Keep your debt liability as low or negligible as possible. When you take a loan, it is advisable to calculate it with a loan EMI calculator. This will help you determine the amount of EMI you can afford.
Lower the loans and debts, higher the affordability.
Coming back to our example of two friends, Mahesh has a home loan to take care of, and he is also reckless about his savings and investments. Hence, his affordability is less than Ravi despite having the same salary.
Affordability and personal finance go hand-in-hand. It would be best if you kept both in check to optimize your financial well-being. If you are looking for smart ways to manage personal finance, you should avail professional money management services. Depending on your requirements, you can hire a mutual fund advisor, wealth manager or personal finance manager.Also read: Investment Options For Fixed Income Source