PERSONAL FINANCE
INTRODUCTION
Personal Finance is the branch of finance that mainly focuses on the financial management of an individual or a family to Budget, Saving and invest over the period of time considering various risks and future events (i.e.. Retirement planning, Children's qualification, Marriage, etc).
Personal finance encompasses plannings like Budgeting, Banking, Mortgages, Insurance, Investments, Tax planning, and retirement planning.
In personal finance it’s important to become financially literate, so we can distinguish between good and bad advice as it is very important to make a smart decision. Personal finance is all about meeting personal financial goals like planning for retirement or saving for your child’s higher education. It all depends on your income, expenses, living requirements, and individual goals and desires, and coming up with a plan to fulfill those needs within your financial constraints. To make the most of your income and savings.
PRINCIPLES
The three main key principles of personal finance are:
- Prioritization
- Assessment
- Restraint.
Prioritization: It stands for giving priority to your finances like from which efforts will keep the money flowing in (Passive income - apart from your fixed monthly salary), and be focused on those efforts.
Assessment: This is the key skill that keeps professionals from spreading themselves too thin. Ambitious individuals always have a list of ideas about other ways they can hit it big, whether it is a side business or an investment idea. While there is absolutely a place and time for taking a flyer, running your finances like a business means stepping back and honestly assessing the potential costs and benefits of any new venture.
Restraint: This is that final big-picture skill of successful business management that must be applied to personal finances. Time and again financial planners sit down with successful people who somehow still manage to spend more than they make. Earning $300,000 a year won’t do you much good if you spend $375,000 annually. Learning to restrain spending on non-wealth-building assets until after you’ve met your monthly savings or debt-reduction goals is crucial in building net worth.
PERSONAL FINANCE STRATEGIES
Financial Planning is better to start sooner as possible as it's never too late to create financial security for you and your family. Here, are some points which you can consider while making a financial plan
- Budget
- Emergency fund
- Investments
- Reduce liabilities
- CIBIL
- Retirement planning
- Tax planning
BUDGET:
Budget is important for living in our terms and to save enough to meet the long-term financial goals. There are many methods but the most effective method which we can adopt to manage the budget is the 50/30/20 method as it offers a great framework.
- Where 50% of taking away salary should go to the necessary items like Rent, Utilities, Groceries, Electricity bills, and Transports.
- 30% is allocated to other additional expenses like shopping, dinner, charity, etc.
- 20% will go towards the future - reducing debts and saving for retirement and emergencies.
EMERGENCY FUND:
Unexpected events can cause any time and it's very important to pay yourself first to ensure money is set aside for unexpected expenses. Such as Medical emergencies, Day to day expenses if gone laid off, Big car repair, etc. An emergency fund should be of the amount as it can manage our six months of living expenses. We should put away 20% of each paycheck every month even when you filled up with your emergency fund you should not stop and start funneling that 20% in a retirement fund or in paying the downpayment on a house if any.
Note: you can keep your Emergency fund invested in a Liquid fund as it is safe and can be redeemed within 24 hours. In case of emergency fund rate of return in the investment is not important, the point which is important is that how quickly we can redeem the money)
INVESTMENT:
In financial planning, Investment plays a crucial role to achieve our financial goals if we saved a lot but not invested our amount then it can be of no use as our money will get affected by inflation because of the time value of money. So, Invest saving wisely is very crucial in financial planning you can invest your savings in Mutual funds as a monthly SIP so you can get the benefits of averaging, and whenever you get any bulk amount you can addon those amounts partially it will help you to achieve higher returns in the long term goals. It has been advised that you should have one SIP for each goal (i.e.. one SIP for retirement, one for child education, Marriage, Buying a house, etc) the only thing that you have to keep in mind is the time duration and the amount to invest in SIP to achieve the desired goal in time.
You can read more about Mutual funds here
You should decide on an investment allocation via... The 100 minus age rule is a great way to determine one's asset allocation. That is how much you should invest in equity and how much in debt. For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equity. The rest should be invested in debt.
REDUCE LIABILITIES:
Here, I'm talking about reducing liabilities considering both Debt liabilities or personal liabilities. We have to reduce debt liabilities as soon as possible and this can be done via. prepayment..a prepayment of a small amount of RS.1000 can also benefit you in reducing the loan tenure and monthly EMI always tries to finish the loan with the highest interest rate first. Talking about reducing personal liabilities you should invest in a Term Insurance plan to secure your family for unexpected events (i.e death) so they can become financially independent and don't have to be dependent on others mercy, and you should also buy a medi-claim policy so you can be prepared for any unexpected medical emergency.
You can click here to know about the 7 Principles of insurance
CIBIL
Credit cards are the main vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, you’ll need a solid credit report. Recommended setting a direct debiting where possible to pay the bills on time the delay in the payment of credit cards bill will affect your CIBIL score.
RETIREMENT PLANNING:
Retirement always seems to believe a time away but it arrives soon than we expect. It is suggested that people will need about 80% of their current salary in retirement. The sooner you start the more you can take a benefit of compounding. The money set aside for the retirement not only gives you the benefit of growing in long term but also reduces your current income tax if funds are placed in a tax advantage plan Such as...IRA (individual retirement account), 401(a), etc.
TAX PLANNING
By maximizing your tax savings, you’ll free up money that can be invested in the reduction of past debts, your enjoyment of the present, and your plans for the future. You need to start each year saving receipts and tracking expenditures for all possible tax deductions and tax credits.
Author ~ Himanshu Rane (PGDM - Finance)
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Personal Finance is quite complex topic and hard to understand
ReplyDeleteBut after reading your blog, now I understood what is personal finance means.
Excellently explained in simple language.👍👍
Thanks buddy :-)
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