Do your finances gets messed up by the end of every month and you always feel broke?
If your answer is yes then in this Personal Finance 101 I am going to clear you’re all the doubts about savings, investing, emergency funds, debt trap, etc. in the simplest way.
So firstly, remember one thing managing your personal finances is not any rocket science. It is just about having your basics concepts, knowledge, and priorities right. Apart from that one of the most important aspects is to have discipline around your financial activities because your habits will only lead to creating a strong financial backbone for future prospects.
MEANING OF PERSONAL FINANCE
Personal finance is all about managing your hard-earned money by using various mediums which will eventually help you in creating long-term wealth and making you financially stable for every aspect of life.
5 MAJOR ELEMENTS OF PERSONAL FINANCE
For having strong self-finance management you should always look upon 5 major elements because it covers all the financial aspects of your life and these are as follows:-
Now we will look upon each element separately and understand their basics to have a clarity around it.
A source of income is like starting fuel in the journey of personal finance because without earning money you cannot be financially independent so, always remember it is the most important step. If I talk about income source we can simply divide it into two segments which is an active income source and a passive income source.
Active income is your regular or monthly earnings which come after doing a full-time job or by running a profitable business and a passive income is your earnings from other sources by doing some extra freelancing activities, having a rental property income, etc.
In my personal opinion, it is very essential to have at least two income sources or more than that because it eases out a lot of things in unprecedented times.
It is our element number two and from the heading only you might be getting an idea that after earning money it is very natural for us as humans to spend the money on our needs and wants to live a happy and comfortable life but the catch here is this spending should be done by creating and following a monthly budget.
You can simply start it by dividing it into two sections first is about your basic needs like food, rent, clothes, monthly bill payments, commuting, etc. which cannot be neglected as these are must for creating smooth living conditions and second is about your desires and wants like frequent travel trips, parties, clubbing, purchasing luxury items, etc. which are just for your show-offs and instant gratification. This needs to be within the budget or else you will always end up in semi Bhikari mode before the end of every month.
After Budgeting your needs and wants another most important thing which I wanted to discuss in this spending section is about Debt Trap and Liability creation because being in one can you cost you a lot or can ruin your financial management before it’s not even started.
Debt Trap and Liability Creation
Staying in a Debt Trap is a vicious cycle created by you. It includes your EMIs of your personal loans, student loans, buying expensive gadgets, credit card bills, etc. it can cost you quick money drain and lots of stress so it’s important for you to pay off your all loans first if you have any and be debt-free.
Another thing is to screw the usage of credit cards or if you still won’t use it then always remember to limit to only 30% of your current income not more than that. Using credit cards frequently creates an additional liability on you which affects your financial well-being as well.
It is another element in your personal finance journey. As an individual, you should start saving as soon as you start earning because this will give you that extra cushion in achieving your financial goals and independence. Savings can be done through various mediums some of the traditional and secure ones are fixed deposits, recurring deposits, Savings Accounts, etc.
But in this section what I wanted to discuss is about the importance of emergency fund creation.
Now you might be thinking what an emergency fund is and how to calculate it for yourself?
So, It is a fund that can cater your living expenses for a time period of six months to a year due to an uncertain event, medical emergency, job loss, etc. it should be three times more than your monthly income, pretty simple right.
Everyone should have their emergency fund in a liquid form because it will help you by giving you easy access at the time of exigency and another benefit is that it will restrain you from additional liability creation in a form of a loan or so.
Till now we have earned, spent and saved but it’s time for learning about our next element and the most exciting one which is investing.
The first and foremost rule is to have a long-term horizon in your investing strategy that only will result in the magic of compounding and will eventually lead to wealth creation so, set your financial goals accordingly and be disciplined with it.
You can invest in various instruments such as stocks, debt funds, mutual funds, index funds, etc. after doing all the research and profiling your risk appetite. This will help you in making an informed decision.
It is the last element in personal finance 101 which deals with the protection of you and your family for different facets of life. Having an early retirement plan and the right insurance plan can really help you in feeling safe and secured in the longer run.
For retirement, you should set your goals prior and plan accordingly. For example, you can choose a National Pension scheme (For Indian residents) for building your retirement corpus.
For an insurance plan, you should have two types of covers majorly. First is life insurance cover which is a must of an earning member or sole breadwinner of a family and a health insurance cover for all the members of the family.
At last, I want to conclude this Personal Finance 101 here by giving you few PRO TIPS which you should apply as well while planning and managing your finances. These are surely tried and tested and give amazing results.
- Pay yourself first before anyone else always remembers to save and invest first before spending on your expenses.
- Have two bank accounts one for saving purposes and another one for spending purposes it will help you in building a financial discipline.
- Before swiping that credit card of yours always remember that you cannot spend the money which you haven’t earned yet this will help you in less liability creation.
- Read or listen audiobook of RICH DAD POOR DAD because this book surely will give you a true insight into money and people’s mindsets.
All the very best for your personal finance management journey. Achieve new milestones with less liabilities and more assets.