Meaning Of Personal Finance
Personal Finance refers to money management with respect to personal savings, expenses and investments. It involves planning your current finances, taking care of your future financial needs, setting financial goals and preparing emergency corpus for unavoidable monetary circumstances. Basically, it is the budgeting of your cash inflows and outflows periodically.
In other words, personal finance is the financial planning of your present and future. It is concerned with fulfilling your needs, identifying your wants, listing your desires and ultimately allocating some amount to each of them to finance all the monetary requirements.
Elements of Personal Finance
Good personal finance management can help you achieve early financial freedom. The key to financial freedom is nothing but below five elements which must be followed religiously to maintain financial rigour and discipline.
Defining Financial Goals
Financial goals can range right from financing your children higher education, children marriage to planning retirement plans. This poses many monetary liabilities on surface. The best route to achieving those commitments is by quantifying them in monetary terms, calculating its inflated value and then starting monthly savings for them.
Defining financial goals gives you a clear vision and insight to work in that direction and sum up that amount of corpus; for you to live a financially free life. Proper financial goals give you a path for allocating your resources to best advantage which can yield maximum returns.
Corpus For Emergency Fund
Having an emergency fund has become a must, especially after events like Covid-19 and the economic crisis. Emergency funds are the contingency reserves which are highly useful during unexpected events or sudden losses. It covers unforeseeable cash flows and also takes care of family emergencies which may arise anytime. It is advisable to have at least 3-6 times of monthly expenses as your emergency fund corpus. However, the amount may differ from person to person.
Insurance and Investment
Protection reserve, other term for insurance and investment, is the cumulation of term and health insurance. Life insurance takes care of your family post your death and health insurance takes care of your medical amenities in case of your health issues.
Both the policies are extremely crucial when it comes to unexpected occurrences in life. They also perform as personal investments which pay good benefits at later stages of life. An ideal amount asided for insurance shall be 10 times of gross income of the insured.
Power of Compound Effect
Early investing gives a great advantage of the power of compounding. The early, the better – sooner the person starts investing, the higher corpus he is able to generate at early stages of life.
People who are new to investment horizon begin from bank FDs and then slowly take steps ahead to Insurance, Systematic Investment Plans(SIPs), Bonds, etc. Investment products like ULIP, Mutual funds etc act as passive income and backward earning sources where you need not work; money works for you!
When you are handy with investments, do not stick to one plan. Rather go for debt, equity, real estate, SIP, insurance and other investment plans so that even in times of hard economic crisis, your portfolio does not generate negative returns. You can adjust your portfolio according to your risk and return ratio and can take the advantage of anytime withdrawal from many of these sources.
Ways to Manage Personal Finance
Personal finance is a subjective habit and requires personal calculations and estimations. However, a basic idea about its management can be summed up as following:
Identification of Financial Needs
As stated above, to manage personal finance, one must identify his needs and wants and do periodic reviews of his income and expenditure. You can further classify your financial goals into small, mid and long term goals and accordingly park your money into those funds or Investment (or saving) channels.
There is a 50-30-20 rule which states that 50% of your income should be used for expenditure, 30% for saving and rest 20% for investment. This is a general line of income disbursement. Budgeting can be done either 50-50, 70-30 or in many other ways which people find their money fit in.
Review your Monetary Goals
Having done a resourceful planning of your funds, you must periodically review and revise your financial goals in order to see if expenses are in control or there are any gaps in actual and standard budgeting. This will help you manage your money even by the end of the month and also help you reap the fruits of personal finance management.