Personal Finance is just a way how to plan effectively and manage your personal cash and its utilization like your income, spending, where to save and invest and if possible attract maximum returns out of the investment. Before I start my post on the topic I will quote one popular statement by American bestselling author Dave Ramsey that
“Personal finance is 80% behavior and 20% head knowledge “
With regards to Personal Finances, one big mistake that generally 90-95% of people commit while making an allocation with their hard-earned money is that
“ Don’t mix Finance and Emotions”
in simple words, it refers to only planning your money by keeping emotions aside. It is a bit tough but it is true if you really want to make something in return for your money.
What is Personal Finance
Personal Finance in general terms is not more than simply managing your income or money you are earning and just keeping track of that. But in actuality, it is a broad term under which many things get covered, which I will discuss in my upcoming series of blogs. Overall, it is about planning your Income, and where to spend/invest that money earned by income. This term also includes the financial decisions which you have to take with respect to your future or retirement.
Importance of Personal Finance
We were never taught about this very crucial part of our finances which is how to plan our Personal Finances. And if at all, some among us are doing it, we are doing it for the short term rather than going for long-term planning. Reasons for doing the short-term planning may be varying on an individual basis, but what do we receive from this activity?… we are left with very minimal or no amount in the savings after some days of receiving income in our accounts. And what may be the reason for it?
Have you ever given a thought to it… if Yes, then wonderful as you are pretty much closer to managing your finances with just slight guidance. But if your answer is No, then you must give a thought to it now else it becomes too late. Let me try to help you through this series of blogs to make you understand how to learn finances better for your future. Do you know why most financial planning fails?…
Because we don’t have efficient and workable cash flow systems or if at all we are having then it is not well defined. The key to finding the money to save and invest is to have good cash flow systems. The cash flow system sounds a bit technical, but in reality, it is just the difference between money deposited in the bank account and money that remained after some time in your bank accounts. That means, it simply reflects the unnecessary expenditure occurred by you which must be tracked and controlled to achieve a better return.
So, Personal Finance is a simple way to divide your money into spending and saving and to generate a method to manage the money automatically. Personal finance has five main segments Income, Spending, Saving, Investing, and Protection from unseen circumstances. Everybody has some money to save and how much he or she can save totally depends on the individual’s financial position. So you should leave this thought of not having enough money to save or invest.
How Personal Finance works
As we have already discussed Personal Finance and its importance, we should now look for the mechanism through which this method can work for us. There are some well-described and widely popular rules which must be followed by each one of us to keep our finances in our hands.
Thumb Rule of Financial Planning
This rule asks us to take paper and pencil and start writing about the total income we use to get on a monthly or on regular basis. And if you are an individual who gets income on fixed intervals i.e as if you are a salaried person then the best time to think and do this exercise is 5-7 days prior to the date you are going to get your salary on hand.
Now, simply divide your salary into three columns of income, spending, and saving. If you can do it then I must assure you that, you are going to be in better control of your finances soon. Because it will clearly tell you about something which is taking your money without your knowledge and that is the wastage or spending unnecessarily.
If it is completed, then you have to relook at where the money is going at regular intervals like Dining out, Marketing, Movies, etc. We should with a balanced approach and what it means to be a balanced approach is
- Spending must not cross by 40-45% of the salary in hand.
- Fixed expenses like bills, EMI, and Loan payout must be within 30-35% of the salary.
- Finally, the rest 15-20% of your salary must go for Saving rather I will recommend Investment purposes.
Second Rule for Finacial Planning
Due to the fast and hectic life of present times, the health status of human beings is taking a back seat. Presently, average life expectancy is decreased because of various medical diseases and other health-related issues. So, we must be ready to face any such unexpected contingency in our lifecycle at any point in time.
And mind it, the healthcare system is quite costly nowadays and we must have sufficient money in our savings ready to meet such contingencies. So, it is highly recommended that we must maintain a reserve fund that must be equal to or more than our 3 monthly salaries. It can be utilized to meet any unforeseen emergencies like medical emergencies or the sudden death of any near and dear ones. The reserve fund is essential so that we don’t have to spend the money out of our savings for these unexpected emergencies.
Protection of life
By protection, I simply mean that we must have a backup for any medical emergency in life so that our savings should not be touched at any cost. If we are getting the same protection cover from any external agencies by paying a minimal amount compared to that emergency then we should purchase it. But unfortunately, we don’t give due attention to this topic and then realize it in later stages of life.
So please be aware of the protection of your life for your children’s sake, if not for your life. I am talking about a thing that everybody knows but ignores and the reason for ignorance may be anything. Here, I am talking about Insurance which we all must have.