Do you have to look through your pockets for money at the end of the month? Worried about your rising debt? Or are you doing well, and just want to do better? This article on Personal Finance will help you, irrespective of which end of the spectrum you are on. No matter how good or bad you are with money, there is always scope to do better.
Anyone who learns to manage their finances wisely will have better long-term financial prospects. This blog will help you understand the importance of personal finance and share a few strategies to help you handle your money better and make the most of it.
What is personal finance?
Personal finance refers to the management of money. It includes budgeting, income generation, investments, insurance, retirement planning, debt management, tax and estate planning, and risk allocation. The term also refers to the industry that helps you manage your finances.
Managing your finances wisely creates avenues for you to be able to enjoy the type of lifestyle you want. And we are here to help you do just that.
What is personal financial planning?
Personal financial planning refers to the process of creating a budget, setting up your investment accounts, managing debt, improving creditworthiness, planning for taxes, and establishing a financial plan to reach all your short and long-term financial goals. It will help you to establish greater control over your finances, create realistic budgets, and gain financial insights that will enable you to plan all your expenses.
There are two ways to go about creating a financial plan:
- Do it yourself: To do your own planning, you will need to equip yourself with knowledge of finance and investment. This should be easy if you look at the right resources, and this blog should help get you started.
- Seek help: You could also consider consulting a certified financial planner. They can offer you advice and create a customized financial plan as per your needs.
What is a personal financial statement?
A personal financial statement is a document that lists all the assets and liabilities of a person at a given point in time. It helps track one’s current financial status and evaluate overall personal finances.
The assets could include savings in bank accounts, investment accounts, retirement accounts, real estate, and other movable and immovable assets like jewelry or art collections. The liabilities may include outstanding balances on loan accounts, unpaid property taxes, mortgages, loans where you are a guarantor, and so on.
The statement helps people and organizations with wealth management and setting and pursuing financial goals. If one intends to apply for credit too, they can come in handy.
What are the areas of personal finance?
The top five key areas of personal financial planning are:
- Income: Your income is the foundation of your financial stability, and flexibility depends on how well you manage it.
- Spending: Making purchases cautiously and keeping a check on your spending helps you to set aside greater amounts for your financial growth in the future.
- Savings: Any money that you want to set aside to meet short-term future needs—both planned and unplanned—is called savings. You should plan to have enough of them to cover your basic needs in case unforeseen circumstances arise
- Investing: The purpose of investing is to generate passive income or grow your money in the long term. Sometimes, investing is also done to beat inflation by a good margin.
- Protection: Planning is also about protecting yourself and your loved ones from financial risks. Insurance helps prepare for unanticipated circumstances.
Why is personal finance important?
Managing personal finances is very important. Here’s why.
It helps with budgeting, savings, and spending wisely
People with a good paycheck could also end up with huge debts. It is important to not spend more than what you earn. Personal finance helps you do this by taking your earnings into account, assessing your monthly expense patterns, and budget making. A good budget ensures you get maximum value from your income.
Can ease up your cash flow
Identifying your spending patterns and keeping track of your expenses can enable better cash flow. Timely tax planning and prudent spending could ensure you keep a greater share of your income and increase your savings.
Assists with growing your assets
By helping you save consistently and invest as per one’s long-term financial goals, personal finance makes it possible to build assets with minimum liabilities attached. Learning how to value assets and picking up a few good debt management practices will take you a long way.
Keeps debt off your books
A little planning can ensure you avoid going into debt to fund your lifestyle. Overuse of credit cards is never a good idea, and neither is taking too many personal loans.
How to manage personal finance
The seven steps below should get you started on your personal finance management journey:
- Assess your current financial status and net worth.
- Track your spending patterns. Classify your purchases as essential and non-essential, and cut down on the latter.
- Write down your short- and long-term financial goals.
- Create a realistic monthly budget that works with your lifestyle. Here is an article that might help.
- Set aside money as savings. Create an emergency fund that you can use during unforeseen circumstances.
- Adopt an investment strategy that will help achieve all your short- and long-term financial goals. Begin with small contributions to all your investment accounts.
- Review your financial goals and investment strategy at regular intervals so that you can maintain and make changes according to current market conditions and goals.
Personal finance strategies
The following are some strategies that will help you manage your personal finance better and become financially independent.
1. Establishing financial goals and creating a budget
First, categorize all your financial goals into short-, mid-, and long-term goals and start saving for them. Here, the 50:30:20 rule of thumb is effective. According to this rule, 50% of your income should go toward meeting daily needs, 30% to wants, and 20% to savings and investing.
Always try to reduce expenses and increase the saving and investing component. Think about your post-retirement expenses and plan ahead. Setting up a fund for it is never a bad idea.
2. Maintaining an emergency fund
Create a fund to cover at least six months’ expenses in the case of an emergency. Doing so will help ensure that if a crisis situation unfolds, you don’t have to rely on debt. The fund should be always kept in liquid investment options, like fixed deposits, to provide easy access.
3. Factoring in your family
Taking your family’s financial health and stability into consideration involves dealing with four things.
- Subscribe to a health insurance package: Health insurance is a great way to mitigate the financial impact of any health emergency. Subscribing to a good health insurance package is crucial due to the rising cost of quality healthcare.
- Buy a term plan: One cannot be sure of the future but good term plan coverage at least takes care of things for those we love, during the policy period.
- Create critical documents: Think about setting up a living will and a healthcare power of attorney.
4. Managing debt
Your debt-to-income ratio shouldn’t cross the 30% threshold. That means, your EMIs should not be more than 30% of your total income in any given month. Too many EMIs can affect your ability to meet unplanned expenses.
5. Saving on taxes
Investing in instruments like Public Provident Fund (PPF), National Savings Certificate (NSC), or Equity-Linked Savings Scheme (ELSS) could help with tax savings and the meeting of financial goals. Studying the Income Tax Act and understanding how to claim tax deductions will help increase your in-hand income.
Personal finance is no rocket science. Anyone having basic knowledge of finance can do it. One just needs to spend money judiciously, practice financial discipline, and learn to maintain a long-term focus.
What does personal finance mean?
Personal finance involves managing individual or household financial decisions, including budgeting, saving, investing, and insurance. It encompasses activities to secure financial well-being and achieve financial goals.
What are the 5 basics of personal finance?
The 5 basics of personal finance include budgeting, emergency fund creation, credit card balance avoidance, timely bill payments, and early investment to secure financial stability.
What are the 5 areas of personal finance?
The 5 areas of personal finance are income, spending, savings, investing, and protection. Managing these aspects effectively is crucial for financial well-being and stability.
Why is finance important in life?
Finance is crucial for managing budgets, achieving financial independence, and realizing life goals. It enables increased savings, investment opportunities, and an elevated standard of living.