Learning the Basics of Personal Finance

As the name suggests, ‘personal finance’ refers to the management of your own or your family’s financial affairs. It is a discipline comprised of the methods, tools and techniques that set you up for financial stability and prosperity.
Jan 2022
4 mins read

Personal finance is a large and evolving subject, but any introduction to personal finance must begin with its three fundamental aspects — budget, protect, and save & invest.

Budgeting to know your finances:

Creating a budget is the key to managing income and expenses better. It begins with listing down all your expenses under respective heads, to give yourself a clear picture where your money is going. Budgeting helps you get an idea of how much money you need to manage for household expenses like groceries, rent, EMIs and insurance premiums. It also helps you figure out how much you can sustainably spend on your lifestyle expenses.

Having a budget will help you meet all your expenses from your income and still maintain a surplus to invest for your future needs. It is important to be disciplined and stick to your budget – if you find you are overshooting it, explore how to reduce living expenses. While cutting down on essential expenses is tough, you could try to reduce your lifestyle expenses like eating out or spending on luxury items. You can use the traditional method of listing down your expenses in a diary, or use an Excel sheet, or even use an app to manage household expenses. Ultimately, disciplined budgeting will show you how to manage your expenses and save more.

Protecting yourself with insurance:

The first step of the personal finance planning process is protecting yourself and your family through life and health insurance.
At the outset, it is imperative to understand life insurance and its benefits. 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 that is at least ten times your annual income1. You could buy a term policy that offers higher coverage with lower premiums.

After life insurance, you may consider health insurance plans for your family. The cost of medical care is rising very rapidly and can drain your finances. With health insurance, your insurer covers your medical costs in the event of illness or injury to you or your family, subject to certain conditions. For those living in metro cities, a family floater cover of at least Rs. 10 lakh is recommended. You can even buy health insurance online. Health insurance can be renewed annually, giving you continued protection from high medical expenses.

Savings & Investing for the future:

The third step of the personal finance planning process is saving up for the future. For most of us, our working lives come to an end when we retire around 60. But with increased life expectancy, a good 20-30 years of our lives extend before us without regular income.

Your investments must be guided by proper investment planning strategies to maximise returns. Before you start investing, it is important to know how to set a financial goal, to give your financial planning a clear objective. These financial goals can be short-term goals, like buying a car or going on a vacation, or long-term goals, like saving for your child’s education or for retirement.

To maximize your returns, you must identify the right avenues to invest. This depends on various factors like your risk appetite and the time remaining to achieve your objective. For short-term goals, you could invest your money in safer debt instruments like fixed deposits and liquid and short term debt funds. However, for long term goals, you could invest in equity, as this asset class has the potential to give higher returns over a longer period (provided this fits in your risk appetite). Also, unlike debt instruments, investing in equity has the potential to generate returns that beat inflation. You could even invest directly in stocks, but this requires considerable research and expertise in the stock market.

Investing in equity mutual funds through systematic investment plan (SIP) could be an option for long-term goal financial planning. At the beginning of your investment journey, you may invest in large cap equity funds basis your risk appetite as they have the potential to provide stable returns over a longer period.

Another good way to get equity exposure is investing in Equity Linked Savings Scheme (ELSS) funds, which are a type of diversified equity mutual funds. These funds also serve as tax saver mutual funds under Section 80C of the Income Tax Act.
When planning for a goal, it is important to assign a monetary value to that goal, and then update it by calculating inflation over that period. Once you know the value of the goal and the year it is due, you can calculate how much you need to invest in mutual fund SIPs to achieve the goal. For this purpose, you can use a SIP investment growth calculator.

These are the fundamentals of financial planning, which will help you get started on this journey. But to make the most of your finances, it’s always good to consult a professional financial advisor, who will help you navigate the personal finance planning process and stay on top of your finances.


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