Top 10 Financial Lessons This Diwali

Diwali, celebrated for its traditions of prosperity, light, and growth, offers timeless lessons for our financial well-being. With insights rooted in real-life examples and key data, here’s how you can learn from Diwali to illuminate your financial journey.

1. Prioritise Safety in Your Financial Life: Just as firecrackers require caution, financial stability demands a solid foundation. Building an emergency fund and securing insurance for health and life is essential. According to the Reserve Bank of India, around 75% of Indian households lack a sufficient emergency fund1.

Example: Consider the 2020 COVID-19 pandemic. Those with emergency funds and adequate insurance avoided financial distress, proving the value of “safety-first” financial planning.

2. Start Investing Early to Leverage Compounding: Diwali teaches us the importance of preparation, which holds true for financial investments. Starting early, even with small investments, leverages compounding for substantial long-term growth. Tip: Start a Systematic Investment Plan (SIP) early in your career. Investing ?5,000 monthly at an 8% return can grow to over ?1.5 crore in 30 years.

Example: HDFC SIPs from the 1990s that began with modest contributions are now worth crores. This emphasises the power of compounding—invest early and watch your wealth multiply over time.

3. Define Financial Goals Like Diwali Plans: Just as we budget for Diwali expenses and gifts, setting clear financial goals for the short, medium, and long term provides direction and purpose. Each goal can be mapped to specific investments, ensuring you're financially prepared for life's milestones.

Did you know? Individuals who define financial goals are 30% more likely to save regularly and invest than those without specific targets.

4. Balance Your Portfolio Through Diversification: Like the variety of Diwali sweets, a balanced portfolio with diverse assets is essential. Diversification spreads risk across multiple asset classes, offering a shield against market volatility. Allocate to stocks, bonds, gold, and real estate to ensure consistent returns.

Example: During the 2008 financial crisis, diversified investors could retain stability, as assets like gold saw growth while stocks declined. A diversified portfolio absorbs such shocks.

Pros: Diversification reduces portfolio risk, while varied returns enhance growth opportunities.

Cons: Over-diversification can dilute returns and increase portfolio complexity.

5. Avoid the Debt Trap—Especially High-Interest Credit: Diwali shopping can be tempting, but managing debt is critical for financial health. Credit cards and personal loans, often with high interest, can quickly snowball. Reducing and avoiding high-interest debt can lead to financial peace.

Example: Consider Indian families that consolidate debt and focus on repaying high-interest credit cards before making new purchases. This habit, according to the TransUnion CIBIL report, leads to 20% faster debt repayment than those who do not prioritise high-interest debt.

Tip: Around 57% of Indians who actively monitor their CIBIL Report do so to secure new credit opportunities, while 20% use it as a tool to improve debt management.

6. Protect Against Uncertainties with Insurance Just as fire safety is essential during Diwali, financial safety through insurance is equally crucial. Many Indians are underinsured; LIC data shows that only 3% of Indians have sufficient life insurance. Ensure your policies cover current needs.

Tip: Annually assess your insurance to keep it aligned with lifestyle and family changes, just as you review your Diwali preparations each year.

Did You Know? Over 80% of Indians are underinsured. Review policies annually to ensure coverage matches your current needs.

7. Review Your Portfolio Regularly to Stay Aligned with Goals: As we clean our homes for Diwali, portfolios need periodic reviews to eliminate underperforming investments and rebalance for optimised returns. This “spring cleaning” ensures you stay on track to meet your financial goals.

Example: Those who reviewed and rebalanced their portfolios in 2020 weathered market volatility better and could capitalise on recovery gains. Annual portfolio reviews keep investments sharp and responsive to market conditions.

Pros: Periodic reviews help rebalance and optimize returns.

Cons: Over-frequent changes can lead to transaction costs and tax liabilities.

8. Learn from Past Mistakes and Build Financial Wisdom: Diwali reminds us to honour tradition and learn from past missteps. Analysing past financial decisions, whether investment missteps or poor budgeting, strengthens financial habits and resilience.

Example: Real estate speculators in 2010-2012 learned hard lessons when property values stagnated. Many pivoted to diversified mutual funds, focusing on long-term growth instead of speculative gains.

9. Foster Financial Knowledge and Generosity: The generosity of Diwali can extend to financial wisdom, too. Share insights about budgeting, saving, and investing with family and friends.

According to a survey, financial literacy remains low in India, with only 24% of adults financially literate. By sharing knowledge, you empower others to make informed financial choices.

10. Celebrate Financial Milestones and Stay Disciplined: Diwali encourages the celebration of achievements, big or small. Recognising financial milestones—like reaching savings targets or paying off debt—keeps motivation alive while reinforcing disciplined habits.

Example: Financial advisors often recommend setting milestones, such as achieving 30% of your retirement goal by age 40. Celebrating these benchmarks, whether small or large, builds confidence and commitment to future goals.

Tip: Maintain a journal to track achievements and set new targets. Celebrating these milestones can reinforce positive financial behaviours and keep you focused on long-term aspirations.        

Final Thought: Embrace Diwali’s Lessons for Lifelong Financial Prosperity

Integrate these Diwali-inspired financial habits to secure a stable, prosperous future. Like Diwali’s lights that dispel darkness, strong financial practices illuminate the path to wealth and independence for you and future generations. Embrace each lesson as a step toward long-term stability and prosperity.

Sources:

1. https://www.business-standard.com/finance/personal-finance/75-indians-don-t-have-funds-for-emergencies-how-to-save-and-plan-for-it-123062100383_1.html