Personal Finance is the consistent management and improvement of your personal funds over the years. In doing so, you need to keep in mind financial risks and future life events such as wedding, purchase of a car or home. You have to look at your preference for varied financial products such as bank accounts, credit cards, personal loans, stock market, bonds, mutual funds, insurances and retirement plans as well as your income tax liability.
Personal finance lets you assess your living daily expenses, periodic expenses and monthly debts or loan payments. This then should be compared to your monthly net income (inclusive of salary, rent, family pension etc.). Thus you prevent yourself from debt because you can take steps to ensure your expenses don’t go beyond your net monthly income. You can monitor your expenses by creating a worksheet that records where you are spending your money. Personal finance allows you to determine the difference between needs and wants. A carefully prepared budget can take care of your needs. Once the needs are met you should think of the wants.
Make adjustments in your budget when you are close to overspending. Reduce on the number of times you dine at restaurants per week or get rid of the cable connection if not being used. Evaluate the importance of expensive luxuries like designer clothes or adoring the house with opulent furniture. Personal finance ensures you pay your bills on time which saves your the extra expense of penalties and fines. Your credit history report remains positive which helps you get a personal loan from a digital lending platform.
Components of Personal Finance
Establishing a budget is crucial to personal finance. A budget helps you track your spending patterns and plan an emergency fund or a travel holiday fund. Budgeting is also crucial for record keeping. The practice of budgeting helps estimate future income and expenditures. Planning for 3-6 months gives you an estimate of how much you spend each month and set an average. Monitor your budget again after a span of 6 months and look for any adjustments or reassessments that could be required. The sooner you set a budget, the better for personal financing.
Another key area of personal finance is to know what your financial position is. You can make use of a document to list your assets and liabilities which will hopefully be surplus on the asset side. Personal assets are car, house, clothes, stock, bank account etc. whereas personal liabilities are credit card debt, bank loan, mortgage etc. Do the same for your income and expenses. Debt is a key component in personal finance. You might have a personal loan or use a credit card. When used in relation to budgeting and tracking, your financial position aids in achieving your financial goals.
Saving money is something you should aspire to do. It could be savings towards an emergency fund or saving for a retirement. Saving and budgeting go hand in hand. The budget tells us how much spare money is left each month. Savings show where we can allot this spare money. Once you have a good amount saved, look for investment options instead of keeping the money idle. Personal finance allows you to stay on top of debt. The debt trap is quite common among millennials but you can avoid that by being responsible about what you spend on.
A fundamental of Personal Finance is keeping records. It provides the foundation on which you can build your personal finance upon. Keeping track of financial transactions includes what you earn (salary slips), what you spend (shopping bills, credit card statement) and what you are saving (bank statement, ATM receipts). How to track is totally dependent upon you. Some keep track of every rupee whereas some keep a record of approximate figures on a weekly or monthly basis. Whichever the way, make sure you do it.
Let us look at 3 reasons why personal finance is important for every salaried professional.
1. Build discipline – When it comes to finances, your discipline can determine if you can reach your financial goals or not. Whether managing your expenses or keeping your records up to date, you have to practice discipline in your everyday life. Speak to family members or read about planning and managing finances. Implement the knowledge you gain to reap the rewards.
2. Take better investment decisions – Personal finance dictates that you invest wisely in options that increase your net income. Find out how to diversify your portfolio because putting all your eggs in one basket could result in financial loss. Likewise, if you invest small amounts in stock but in different companies, your risk is spread out meaning all is not lost in case any one company suffers losses.
3. Achieve long term goals –Personal finance allows you to look at the bigger picture and foresee many years in advance. Avoid living from paycheck to paycheck. Avoid spending above your credit card limit and pay your loan EMIs on time. Devoting a bit extra towards your savings might look like a big sacrifice today but in the long run, with proper budgeting and financial planning, you can achieve all your long term goals.