Personal Finance

 Personal Finance

Managing your money—including saving, investing, and setting financial goals—are all part of personal finance. So are areas like budgeting, retirement planning, and saving for your children’s college educations.

BUDGETING

Managing finance for beginners starts with budgeting. In simple terms, budgeting refers to the process of creating a plan of spending your money. A fine art, it allows you to allocate money for a range of needs.

During budgeting, you need to identify your source of income and be clear about your needs and wants. Needs refer to things necessary to survive, such as food, clothing, shelter, etc. On the other hand, wants comprise desires such as buying items of décor, going on vacation, and eating out often.

While budgeting, you also need to make room for emergencies and identify short and long-term goals, which form the basis of the next two components – savings and investment. Note that you must make a realistic budget, stick to it and review it periodically.

SAVINGS

To address and achieve your financial goals, you need to save. While there’s no fixed rule on the amount you must save, as cash flow and needs vary across individuals, you can follow the 50/30/20 rule. As per this rule, you must spend 50% of your income on needs, 30% on wants and save the remaining 20%.

If you find it difficult to save otherwise, you can automate the same. There are several financial instruments that help you automate your savings, and as a beginner you can opt for a recurring bank deposit. By giving standing instruction to your bank, a fixed amount is deducted from your primary savings account and deposited in the recurring account.

INVESTMENT

Investment is essential to grow your money and build a corpus for addressing short and long-term goals. You can make investments in fixed-return and market-linked products. In the former, the returns are fixed, while in the latter they depend on the performance of the market.

Bank fixed deposits, company deposits and recurring deposits are examples of fixed return instruments. On the other hand, stocks and mutual funds fall in the category of market-linked products.

Depending on how much risk you can take or absorb, and your investment horizon — the time frame of investment — you can choose to invest in the products of your choice.

IN CONCLUSION

Personal finance hinges broadly on the three components mentioned above. There’s more to it, and you can learn them with time. With changing priorities, you can seek help from a professional for an in-depth understanding.

1. Step 1: Identify your current financial situation. ...
2. Step 2: Identify your goals. ...
3. Step 3: Identify financial gaps. ...
4. Step 4: Prepare your personal financial plan. ...
5. Step 5: Implement your financial plan. ...
6. Step 6: Periodically review your plan.

40% of your income goes towards your savings. 30% of your income goes towards necessary expenses (food, rent, bills, etc.). 20% of your income goes towards discretionary spending (entertainment, travel, etc.). 10% of your income goes towards contributory activities (donations, charity, tithe, etc.).