I have always come across many people who have done all the hard work in their respective careers and professions but have been unsure of how to efficiently manage their personal finances. I will attempt to present few basics of Personal Finance in the layman's language.
So, Personal Finance at a very basic level is managing your money in the most efficient manner. It includes saving, investing, insurance requirements, retirement planning, real estate needs and tax planning.
It is about meeting personal financial goals, funding different goals like your child's education and marriage, planning for your retirement, buying a dream home or just accumulating wealth.
The first rule of personal finance is always 'Pay yourself first' this simply means that a certain percentage of income needs to be saved before it is spent. Income minus savings is expenses and not the vice versa. Once you have identified your financial goals, take an estimate of inflation adjusted requirements and decide how much of savings or investment is needed to achieve that. Saving the 10 percent of your income is a good start according to me and then increase it to 20 or 30 percent. You also need to manage based on your phase in life like when you are young, you have relatively less liabilities but that increases as you age. There are a very few basics on this, one of them is 50/30/20 rule.
The 50/30/20 rule is a very popular budgeting method. This method can be divided into the following three parts:
Another aspect important here is maintaining an adequate Emergency fund of say 3-6 months. As the name suggests, it is generally for financial emergencies. It can happen anytime hence you need to provide a cover for your household and monthly recurring expenses by saving enough. You cannot risk missing an EMI.
Keep a Tab on your expenses. If you are someone who is used to living a life from paycheck to paycheck then you are probably spending too much or need to work hard to increase the income. There might be a lot of unplanned expenses which can be avoided. There are lots of apps like Mint, Level Money which help in monitoring the expenses, using that might be useful. You can also categorize the expenses based into necessities or luxuries, fixed or variable. A more focused approach will lead to positive results in no time but you need to stay committed to the plan.
Happy Saving!
So, Personal Finance at a very basic level is managing your money in the most efficient manner. It includes saving, investing, insurance requirements, retirement planning, real estate needs and tax planning.
It is about meeting personal financial goals, funding different goals like your child's education and marriage, planning for your retirement, buying a dream home or just accumulating wealth.
The first rule of personal finance is always 'Pay yourself first' this simply means that a certain percentage of income needs to be saved before it is spent. Income minus savings is expenses and not the vice versa. Once you have identified your financial goals, take an estimate of inflation adjusted requirements and decide how much of savings or investment is needed to achieve that. Saving the 10 percent of your income is a good start according to me and then increase it to 20 or 30 percent. You also need to manage based on your phase in life like when you are young, you have relatively less liabilities but that increases as you age. There are a very few basics on this, one of them is 50/30/20 rule.
The 50/30/20 rule is a very popular budgeting method. This method can be divided into the following three parts:
- 50 percent of your take home income should ideally go towards living expenses including routine household expenses, groceries, rent, utilities etc
- 30 percent of your take home income should ideally be for lifestyle expenses and spending on things like dining out, travel etc
- 20 percent of your take home income should be saved for your future goals including retirement, short and long term goals and also paying down debts.
The idea is to create a broader framework for maintaining a better control for your finances. The above percentages can be changed based on the age and circumstances of the person since we cannot accurately predict everything in the financial terms.
Another aspect important here is maintaining an adequate Emergency fund of say 3-6 months. As the name suggests, it is generally for financial emergencies. It can happen anytime hence you need to provide a cover for your household and monthly recurring expenses by saving enough. You cannot risk missing an EMI.
Keep a Tab on your expenses. If you are someone who is used to living a life from paycheck to paycheck then you are probably spending too much or need to work hard to increase the income. There might be a lot of unplanned expenses which can be avoided. There are lots of apps like Mint, Level Money which help in monitoring the expenses, using that might be useful. You can also categorize the expenses based into necessities or luxuries, fixed or variable. A more focused approach will lead to positive results in no time but you need to stay committed to the plan.
Happy Saving!
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