Personal Finance
Personal finance is simply all about individual management of finance. This includes all the core aspects of finance i.e. budgeting, saving, investing, tax, debt, insurance and mortgages etc. This also consists of the financial services provided to the individuals to help them with their money. It is indeed a responsibility to handle individual financial tasks, keep an eye on the current and possible future financial position, invest, and set up financial goals.
Why do we need Personal Finance?
Suppose the only breadwinner of the family dies, you lose your job suddenly, there's a complete lockdown in your city for a month or any kind of medical emergency. Amidst all this what do you do? How will you manage the expenses and live with dignity? The answer to this question is the sole reason why we need personal finance in our lives. To escape the burden of loans and debts and for the sake of our sanity.
Finance is the main cause of stress and depression in adults. The rising inflation and interest rates have left everyone worried. Consequently, this makes it vital for everyone to learn financial management skills and keep track of their money.
Finance is the main cause of stress and depression in adults. The rising inflation and interest rates have left everyone worried. Consequently, this makes it vital for everyone to learn financial management skills and keep track of their money.
5 Foundations of Personal Finance
The five foundations/areas of personal finance are as follows:
1. Income: Income is the gross or total amount of money that you own and that you allocate for spending and investing. This cash inflow can be in the form of salary, bonus, pension, wages, and dividends.
2. Saving: Savings are usually for something you want/need or for rainy days. This is the amount left from your income after deducting all the expenses. It is a good practice to save for at least 3-12 months of expenses but not more than that. The extra money in your savings account loses its value due to inflation and should ideally be invested. You can save in the form of cash, in a savings account, or even in financial securities.
3. Spending: This is all the cash outflow in the form of expenditures. It can be anything from grocery to rent, travel, utility bills, etc. To live stress-free, our spending must always be less than our income. This way we can remain debt-free.
4. Investing: Investment is the money you spend on acquiring property and assets like stock and bonds. This investment then pays off a certain percentage of return on the invested amount. Investment is a tricky thing to understand. There is a risk as the assets can incur profit or loss depending on various factors. It is thus advised to invest in diversified portfolios(investment opportunities) to hedge maximum risk. You can also ask for professional help if you find it difficult to deal with. Some investment opportunities include stocks, bonds, mutual funds, real estate, financial derivatives, and securities.
5. Insurance and Wealth Preservation: People opt for insurance to avoid unexpected events like accidents or medical illnesses. Also, wealth preservation is vital and is required for retirement and estate planning.
2. Saving: Savings are usually for something you want/need or for rainy days. This is the amount left from your income after deducting all the expenses. It is a good practice to save for at least 3-12 months of expenses but not more than that. The extra money in your savings account loses its value due to inflation and should ideally be invested. You can save in the form of cash, in a savings account, or even in financial securities.
3. Spending: This is all the cash outflow in the form of expenditures. It can be anything from grocery to rent, travel, utility bills, etc. To live stress-free, our spending must always be less than our income. This way we can remain debt-free.
4. Investing: Investment is the money you spend on acquiring property and assets like stock and bonds. This investment then pays off a certain percentage of return on the invested amount. Investment is a tricky thing to understand. There is a risk as the assets can incur profit or loss depending on various factors. It is thus advised to invest in diversified portfolios(investment opportunities) to hedge maximum risk. You can also ask for professional help if you find it difficult to deal with. Some investment opportunities include stocks, bonds, mutual funds, real estate, financial derivatives, and securities.
5. Insurance and Wealth Preservation: People opt for insurance to avoid unexpected events like accidents or medical illnesses. Also, wealth preservation is vital and is required for retirement and estate planning.
Best Practices and Tips for Personal Finance
- Know your net income. Net income is the total amount of money you take home after deducting all the taxes. This is the most basic step and everyone should understand it.
- Create your budget. Budgeting helps in saving for the future and staying within the means. There are various budgeting techniques like the ‘Envelope system budget’ where cash is liquidized and put in various envelopes each for different expenses. Another famous method is the 50-30-20 rule. Here you dedicate 50% of your net income to living necessities, 30% towards wants, and 20% to your future savings.
- Debt limitation and reduction. The only method to avoid debt is to stay within one’s means. Always try paying your bills on time and your credit card payments should be cleared monthly. If you land in a situation with debts and interests, prioritize the most expensive one for it will reduce the overall interest amount you have to pay.
- Think about your future, your family, and your retirement. Invest and set up funds accordingly.
- Keep a record of tax deductions and credits. Where tax deductions will decrease your income, tax credit helps in saving some.
- Lastly, remember the rule: the higher the return, the greater the risk. Borrow only what you can pay off and compare interest rates before putting your money into anything.
Ending Note
Personal finance is a very broad term and a lifelong practice. Therefore, try educating yourself on personal finance through blogs, articles, online classes, videos, and podcasts. Keep up with the latest news and trends prevalent throughout the financial industry. Also, with time, people change and so do their wants, needs, and circumstances. Therefore, it's a good practice to re-evaluate and adjust your personal finance goals every year accordingly.
Know all about Taxes -from types to reduction strategies here.
Know all about Taxes -from types to reduction strategies here.
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