How to Improve Your Personal Finances
Good personal finance habits are important for each of us. The earlier you adopt these habits, the better it is. But remember, it’s never too late to change. If you’re looking to overhaul your personal finances, here are some methods to put you on the path to prosperity:
Mar 2023
4 mins read
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Build an emergency fund
Having an emergency fund is the first step towards financial prudence, and the
pandemic has shown us why it is so important. A recent survey found that
creating an emergency fund has become the top financial goal in order to tide
over financial emergencies like a job loss.
“How much should I keep in an emergency fund?” you might wonder. While the
corpus would vary depending on individual’s lifestyle and finances, the thumb
rule is to have at least six to twelve months of expense saved to provide
cushion for an income loss. You can begin the process of building an emergency
fund by putting away your surplus every month.
The next question that would arise is where to put your emergency fund. You’d
need money quickly in an emergency, so the emergency fund should be parked in
a liquid instrument. This will help you access it immediately when required.
While you can keep your emergency funds in a savings account for easy access,
the interest offered is very low. Instead, consider Liquid Funds or Ultra
Short Term Funds.
Save first, spend later
This is one of the most important personal finance lessons. Many of us tend to
spend and then save whatever is left at the end of the month. But this could
lead to careless overspending before you realise it. Instead, try to set
yourself a saving target and work within that. One way to bring this
discipline is to automate the saving process through a Systematic Investment
Plan (SIP).
Start budgeting expenses
It’s imperative that you create a budget to manage income and expenses. The
first step is to list down the various heads of expenses. Once you make a
budget, you will know how to better manage household expenses like groceries,
rent, utilities, insurance premiums and so on. It will then help you keep
aside a surplus every month, which will power your savings. You can plan your
budget by using a diary or an excel sheet, or even using an app to track
household expenses.
Streamline living expenses
If your expenses take up too much of your income, you might want to understand
how to reduce your expenses. Budgeting will give you a clear picture of your
expenses and help you spot where you might be overspending. Some expenses,
like rent, EMIs and insurance premiums, are unavoidable. However, you may be
able to cut down on other lifestyle expenses like eating out and impulse
shopping.
Get life insurance
A key step in the financial planning process is getting life insurance to
ensure your family is protected if something were to happen to you.
Interestingly, a survey shows that most consumers intend to buy life insurance
within the next six months as part of their financial plan.
Understanding life insurance and its benefits is essential for every investor.
Life insurance provides financial security for your family (or other
beneficiaries) in the event of your demise, in the form of a payment to
replace your lost income. You may consider buying a life insurance policy
which is equal to at least ten times your annual income. A term insurance
policy which offers higher coverage with lower premium can be considered.
Get covered for health insurance
As healthcare costs rise, out-of-pocket medical expenditure can put a huge
strain on your finances. Thus, it is important to get health insurance for
your family to protect your finances in the event of any medical emergency.
Health insurance also offers cashless benefits where the insurance company
directly settles your hospital bills. If you live in a metro city, it is
recommended that you buy a family floater policy of at least Rs. 10 lakh. You
can buy health insurance online by comparing different products offered by
various insurers.
Power up your financial planning
The final step to improve your finances is on the personal finance and
investment front. You will need a detailed financial plan to guide your
financial journey. According to a survey, 41% respondents revealed that their
most important goal was to build a financial plan. You need to identify your
objectives clearly so you can work towards them. These could be short-term,
like buying a car or planning a trip, or long-term, like saving for your
child’s future or planning for retirement.
Plan for your financial goals
First, decide the monetary value of the goal today. Then, adjust it for
inflation depending on the time left to achieve that goal.
Here’s an example:
| Cost of higher education for your child now | Rs. 15 lakh |
| Age of your child now | 10 |
| Assumed rate of inflation | 6% |
| Cost of higher education when your child is 18 | Rs. 23.90 lakh |
Once you have decided your goals, you need to chart out a plan for achieving
them. The nature of your goal-based planning will depend on your risk appetite
and the time available for such goals.
Choose smart avenues to invest
Where you invest for a certain goal would depend on your risk appetite and the
time horizon to achieve that goal. For short-term goals, you can invest in
short term Debt Funds. However, for long-term goals like retirement, you could
invest in diversified Equity Funds based your risk appetite, which could help
you beat inflation. Investing in equity mutual funds through systematic
investment plans (SIP) is more suitable for most investors. It is recommended
that you take the advice of professional financial advisors who can help with
personal finance needs and guide your investment decisions.
It's never too late to take control of your personal finances. By following
these steps and taking help from professional advisors, you can always get
your finances on the right track.
Disclaimer: Mutual fund investments are subject to market risks, read all
scheme-related documents carefully.
Sources:
1.
https://economictimes.indiatimes.com/investments-markets/eight-crucial-numbers-to-ensure-financial-success/10-times-the-annual-income-is-your-life-insurance/slideshow/16699748.cms
2.
https://www.livemint.com/Money/1WMKPK9oxCYBW4Mi0silzH/How-much-health-insurance-cover-should-you-buy.html
3.
https://economictimes.indiatimes.com/wealth/personal-finance-news/due-to-covid-19-creating-an-emergency-fund-now-is-a-top-financial-goal-survey/articleshow/87325689.cms
4.
https://www.livemint.com/money/personal-finance/60-indians-stayed-invested-despite-market-volatility-due-to-covid-says-survey-11628488924801.html
5.
https://m.economictimes.com/industry/banking/finance/insure/survey-finds-insurance-as-most-preferred-financial-product-to-protect-family-post-covid/articleshow/81254429.cms
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
All the Mutual Fund investors have to go through a one-time KYC (Know Your Customers) process. Investor should deal only with the Registered Mutual Funds (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit https://www.pgimindiamf.com/ieid.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Read more
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