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What is Personal Finance?
We all have money, and we all use money, don’t we? However, the fact is also true that some have more and many have less. Some have billions and millions, while many are penniless. But all who are living or surviving in this world depend on money, and Personal Finance has nothing to do with how much money you have!
Money is all that people need to get food, cloth, and a shelter. But this was the concept of the past. Now, money is more than just surviving. It is more about luxury, convenience, and freedom nowadays. More than just a paper or coin, it is also about saving, compounding, investing, and whatnot.
Managing money, i.e., saving, investing and compounding, is an art, and the term that covers this concept is called Personal Finance. It covers a lot more concepts such a Budgeting, Banking, Insurances, and wise Spending too! This term refers to the entire finance industry or other industries that involve money.
Finance of an Individual
In clear terms, Personal Finance is more about an individual managing his own money and finances. Analysing the current worth, monthly income slips, paychecks, asset allocations to future planning, investments, and other finance-related scenarios all comes under personal finances.
In the current scenario, it is used as a stepping stone to achieving one’s future financial goals. Be it to love a good life, buy a car or a house, retire early, or become financially independent. In this article, I’m going to tell you some basic principles and strategies to take care of your personal finance and achieve the goals you’ve desired.
I’ll be taking into account a common goal, i.e., obtaining financial freedom and retiring early, because it is the ultimate goal of every individual.
Strategies for your Personal Finance –
To create a life of better financial literacy and freedom. Start by –
- Create a Budget
- Build an Emergency Fund
- Pay off Debts
- Consider your Responsibilities
- Start Saving for Investments
- Start Investing
Bonus: Credit Score
1. Create a Budget –
A budget is often ignored but proves to be one of the best strategies of personal finance. Devising a budget gives you a clear view of how much you need to spend, how much you have to save and at what rate you have to increase or decrease your spending/saving rates.
Ideally, for people who do not understand much about finances, there is a life-saving rule that can be followed. The 50/30/20 Rule is simple yet very powerful. Let me explain it more clearly –
Allot 50% of your take-home income or paycheck for your daily needs and essentials, such as rent, bills, food, transport, utilities, etc. This half chunk of your money should be sufficient to pay off your daily needs.
If not, then I think you must cut down some of your wasteful spendings. Introspect if you are under the impression of Consumerism, i.e., people who buy stuff for the sake of showing off.
1. All I say is, whatever you do, limit everything basic within this 50% range.
Now, for the next 30%, allocate this per cent for your unrestricted expenses and a little luxury. That is, when you dine out, go on shopping, weekend trips, etc. Your charity, if there is any, should also come under this 30%.
2. In short, all other expenses that are not necessarily come under this chunk. Although, I advise you to cut down a little of this too!
The last 20% goes to your future plans and goals. Pay your debts, create an emergency fund, and start investing. I get that doing all three by this small per cent of the money is not practical. That is why I ask you to do them one by one, as mentioned below.
- But first, important note – This 20% is the minimum per cent advised! You are free to increase this, but going on the negative part is not advised at all!
2. Have a Backup (Emergency Fund) –
It’s true that we always think about our future plans and we work towards it. Our future goals give us inspiration and motivation to carry forward. But it is also a fact that the future is unpredictable and uncertain. Anything can happen; it may be better or worse than we could have ever imagined.
That’s why having a backup is a good idea. The first thing after you devise your budget is to create an emergency fund that can handle at least 6-8 months of your expenses in any difficult situation. You may get fired; you may have some medical emergency or any unexpected expenses or events. In case you quit your job to start something new, this emergency fund would help you set up and be relaxed for a while.
So, first of all, figure out your monthly expense. Multiply it by six or eight and start saving. Save from the allotted 20% quota that we talked about. Once you are done with your emergency fund –
3. Pay off your Debts –
You may or may not have any debts. For example – House loan, Study loan, Car loan, Personal loan, etc.
If you have, stick here, and if you don’t, then you too stick here. Because debt is a sensitive topic, and most of us learn its lessons the hard way. I learnt it the hard way, and I’m going to tell you why –
You must have read or heard somewhere about compound interest. It grows your principal amount exponentially. You get interested in the interests earned. Like – when you invest your money for the long term, your money grows, year by year. Similarly, debt is also a form of money, it also comes with interest, and if you roam around with debt in your hand, it is going to take you for a ride! Trust me on that!
Nobody wants to pay huge debts all of their lives. Therefore, the sooner you get out of the trap, the better. Hence, the third step –
Get rid of all of your debts. If you are not under any debt trap already, then I advise you to stay away from it.
4. Consider your Responsibilities
The point when you are reading this article, your age can be anything, and the responsibilities on your shoulder can be anything from your own, your spouse, children or the whole family.
Therefore, once you have created an emergency fund and paid off debts, now is the time to consider your family and responsibilities before you start saving and investing. Because you may have to feed a family of two, three, four, or any number of people, and your money is not just yours for saving, investing and making you rich. Because trust me, family, friends and relations worth way much than any form of wealth.
Hence, once you’ve taken care of your responsibilities, you’ll have a better idea of how much to save and invest!
5. The Entry Point – Start Saving
Now that you have taken care of every pre-requisite of this Personal Finance Strategy guide, all you are left with is jumping into the game. Start saving! Start saving more than you ever thought you could. The more you save, the better you can invest and earn interests.
You can cut down your wasteful expense, shop less, try to eat home-cooked food, avoid eating junk and buying too much. All this can help you save more money.
Cut down the small expenses that look nothing at the time. But when you take into account for a year or two, you’ll see what those small expenses can save. For example –
Suppose you buy a drink for $1 every day. One dollar is nothing, right? Now let’s see –
One day – $1
One year – $1 x 365 = $365
If you invest $365 per year, after ten years, at the normal return rate of 15%, you would have –
Amount Invested = $3650
Maturity Amount = $8200
It’s almost double, and $8200 is not a small amount, is it?
Well, it was just an example. You should know better where your money is going and how can you save more. That is why our first step was to create a budget!
Saving and Investing go hand in hand. Let me tell you how –
Now, Investing can be done frequently in small amounts or upon intervals with a large amount. When I say investing and saving go hand in hand-
I mean that if you want to invest frequently, like in a SIP (Systematic Investment Plan), you can save and regularly invest, i.e., monthly or quarterly.
And if you decide to invest in big chunks, you can have a Lumpsum amount for funds or can buy individual stocks.
Well, this was just an example. Investing is much more complex yet easy to understand. But let’s keep it for another time. In this article, the main focus is to Start Investing. Start investing as soon as possible because the best day to invest was yesterday. Your second-best chance is today!
You can educate yourself about investing – It’ll take some time.
You can hire Financial Advisors – It’ll take a considerable amount of money out of your pocket
You can have a free video call session with me where I’ll teach you investing and finance basics – It’ll cost you Nothing!
I’ll sell no course, no membership, nothing. All I want is true feedback and a promise to collaborate anytime in Future. If that sounds good –Hop in and contact me via Contact Page and schedule a call.
Bonus – Credit card and Credit Score
A credit card is the most stupidly-used financial thing. It’s like a double-edged sword, and people tend to use the edge where they cut themselves.
It’s true that a credit card spoils you and lets you use the money you never had. Then it asks you to pay that money back with interest. And the more time you take to return the money, the more you get stuck in debt, and eventually, it rips you apart.
But! If you use a credit card wisely and pay all your debts in time, you can maintain a healthy Credit Score which eventually helps you get loans at lower interest rates in future. A good credit score is like an Identity Card that shows your ability and punctuality in paying off debts.
Hence, use a credit card wisely and maintain a good credit score. That will help you in future.
In this article, I’ve stated seven ways (including the bonus point) to manage and boost your Personal Finance. It starts from getting ready with funds, savings and getting debt free and goes up to investing and utilising your money.