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
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 nowRs. 15 lakh
Age of your child now10
Assumed rate of inflation6%
Cost of higher education when your child is 18Rs. 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.

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
PGIM India Asset Management Private Limited
(CIN - U74900MH2008FTC187029)
Toll Free Number: 1800 266 7446
Email: care@pgimindia.co.in
This is an Investor Education and Awareness Initiative by PGIM India Mutual Fund.
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.
The information contained herein is provided by PGIM India Asset Management Private Limited (the AMC) on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, the AMC cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance* (or such earlier date as referenced herein) and is subject to change without notice. The AMC has no obligation to update any or all of such information; nor does the AMC make any express or implied warranties or representations as to its completeness or accuracy. There can be no assurance that any forecast made herein will be actually realized. These materials do not take into account individual investor's objectives, needs or circumstances or the suitability of any securities, financial instruments or investment strategies described herein for particular investor. Hence, each investor is advised to consult his or her own professional investment / tax advisor / consultant for advice in this regard. The information contained herein is provided on the basis of and subject to the explanations, caveats and warnings set out elsewhere herein. The views of the Fund Manager should not be construed as an advice and investors must make their own investment decisions regarding investment/ disinvestment in securities market and/or suitability of the fund based on their specific investment objectives and financial positions and using such independent advisors as they believe necessary.