Well who doesn’t need more money? We have bills to pay, eat at swanky restaurants, or have enough cash to fuel numerous Credit Cards. Similar to any financial module, may it be Personal Loan, Credit Cards, CIBIL or Digital Payments, financial management is also clouded with myths. Financial management may mean different things to someone living in a metro compared to someone living in non-metro cities. Factors such as age, income, demographics, customs and lifestyle choices influence how millennials plan their budget, credit and expenses. Before we get into the myth busting, you need to understand what financial management is and its benefits.
What is Financial Management?
Financial management refers to the effective management of your money. The purpose of financial management is to organize, direct and control your financial activities in such a way that you manage your income proactively; rather than reactively. It allows you to accomplish monthly tasks such as bill payments, loan EMI payments, policy premium payments, and utility payments like electricity, water, food, rent, shopping, grocery, etc.; without stretching your monthly budget.
The better we plan our finances, the more we can spend on ourselves for a summer trip abroad, a luxurious sedan (GST might make you reconsider) or an extravagant wedding ceremony.
Financial management encompasses budgetary control, saving strategies, debt management, and financial goal creation. Financial management gives you an insight to take better decisions with regard to investment choices. How much from the monthly income to allocate towards investments, how much to put into an emergency fund to pay-off EMIs, etc. – are some questions answered through financial management. Financial management lets you assess your daily expenses, periodic expenses, and monthly debts or (loan payments). This assessment should be compared to your monthly net income (inclusive of salary, rent, family pension, and more). You can monitor your expenses by creating a worksheet that records your spending. Financial management ensures you pay your bills on time which saves the extra expense of penalties and late fees. Your credit history report also remains positive which helps you to get a personal loan from a digital lending platform such as Loan Singh.
Components of Financial management
Budget – It helps keep track of spending patterns and to keep aside an emergency fund.
Credit – It is a key component of financial management because all of us need credit for either home improvement, wedding or medical expenses. It is important to clear-off the credit responsibly.
Savings – It helps you dictate your standard of living. If you have good amount of savings, you can then direct it towards investment options such as digital lending to gain returns. If you have good savings, you are also relaxed in case financial challenges crop up.
Tracking – Keeping track of financial transactions such as salary slips, card statements, ATM receipts, etc. tells you where each rupee of yours is being spent.
Roadblocks in Financial management
Exceeding the monthly budget – Crossing the monthly budget is very common and should be avoided. If you consistently breach your monthly budget then it’s time for you to re-plan and re-do. Check what you are constantly over-spending on. See if you are reviewing the expenses based on receipts and statements.
Unexpected expenses – You cannot predict when sudden expenses may come-up. Your laptop may need repairs, the car might need some repair work, there might be a leakage in the ceiling, and sudden hospitalization of loved ones are just some examples which can throw your personal finance out of the window. Personal loan is a good option to tackle emergency expenses.
Busting some Financial Management Myths
After understanding financial management components and roadblocks, we put on our myth busting hat.
Myth #1 – Think of retirement only when you retire
As a salaried professional, focused on climbing the rungs of your career ladder, this might not be the time to think of what you would do when you retire. But doing so when you are already at that stage would be wrong.
Myth #2 – Gold and real estate are the best investment options
We are driven towards physical assets. We feel they are tangible commodities that remain with us for posterity. With the advent of P2P lending, any salaried individual can invest his/her money into a P2P platform or company.
Myth #3 – Any loan is bad for our budgetary control
If you are a salaried professional, with a good repayment capacity and positive intent of clearing the loan without defaults, then a personal loan is a good option for spending towards house repairs, home improvement, etc.
Myth #4 – Debt consolidation is bad for credit bureau score
In debt consolidation, you apply for a single personal loan to pay-off all other smaller loans you have. This way you only have to worry about one monthly payment instead of many. Debt consolidation, if done diligently, can boost your credit bureau score. This is because you close all your previous multiple loans at once thereby improving your credit bureau score. By being prompt with your repayments for the singular loan you can boost your credit bureau score even more.