Personal finance is a mechanism which involves generating, spending, protecting, saving & investing your money. Personal finance is about meeting your financial goals, whether short term or long term. It is only possible when you’re aware of where your money is actually going. Likewise, finance is the backbone of any organization. It holds a similar nature of importance in a person’s life. Many times, we end up committing financial mistakes which do backfire us later. In this blog, we are going to discuss some points which will help you to understand and manage your personal finance effectively. Moving to the pointers:
Prepare and Follow a Monthly Budget
It is the beginning of everything. If you want to be on top of your finance, you got to prepare a monthly budget and stick to that religiously. So prepare a sheet and divide into two parts, i.e. budget and actual. Anticipate all the sources of your cash inflows and outflows and list down those in the budget section. If you’re a salaried person, then your primary (in most cases, the only) source of income will be your salary.
Now, list down all your anticipated outflows in various categories basis. Like food, accommodation, investment, travelling, study, medical, entertainment, others etc. The list is subjective and anyone can have a different set of expenses than others. But listing down every expense is important so as to have tracked over that. Let’s check out a basic rule to understand it properly.
The 50-30-20 Rule
The 50-30-20 Rule gives a framework for your budgeting:
- 50% of your take-home pay or net income (after taxes) goes towards living essentials such as rent, utilities, groceries and transport;
- 30% goes towards the future i.e. paying off the debts and saving for emergencies and retirement purposes;
- 20% is allocated to lifestyle expenses, such as dining out and shopping.
So, this was the budget part, now coming to the actual cash flows. When you’re actually dealing with the cash flows, make an entry of those on a weekly basis, so that you don’t miss out on anything. After a month being completed, compare the budget numbers with actual ones and analyse the variances.
What are the areas in which you spent more money than anticipated? And which ones went under control? You can make the necessary changes accordingly. If you feel creating a file for this purpose cumbersome, then there are various personal budgeting apps available online which you can use as an alternative. Preparing and following your budget will help you to be on top of your expenses and your finance will seem to be under your control.
Postpone your Purchases
This is the best way to control your cash outflow. Defer your purchases by some time frame, which may be 7 days, 15 days, 1 month, 3 months or even a year. How many times does it happen that out of a sudden urge for something you bought some stuff and in just a few days you got bored with it? I guess many times. That’s exactly what I am trying to point out here. We buy things out of urge or of need.
When we defer our purchases by even 7 days, we get rid of the urge which makes it compulsory to buy in most cases, consequentially saving a lot of bucks. Even after waiting for some time period, if we are still feeling the need to buy that thing, you may proceed with buying that because that is something you actually require. And of course, while waiting you were also saving the money to buy that, helping you to avoid any kind of debt. Remember, filtration is required when deciding what to buy and what not to as that’s going to help you to be on top of your finance.
Don’t use Debt to Buy Stuff to Manage your Personal Finance
You must have heard that “debt is a trap”, it’s true in any sense. The biggest mistake you can commit is to buy something and converting the payment into instalments. This way you just end up paying way more than the value of the item you’ve purchased. The banks snatch your earned money in the name of interest. You can counter me here by saying, “that happens because of the time value of money concept”, but is it really so? Is it really worth it to pay more amount than the value you’re receiving, especially when you could have deferred your purchase and get the stuff at a cheaper price because in this case, the market would have worked in favour of you and not against? Food for thought.
Further, you will value the things you buy in cash more than those you buy on credit because of the pain taken by you upfront to save and invest the money to buy the stuff. It’s always said that “pay first enjoy later” option gives you more peace of mind than “enjoy first pay later”. By stuff, I mean anything, literally anything here, be it your smartphone, watches, branded clothes and even your car or house.
When you’re buying big items like a car or a house, then it may not be possible to buy that 100% in cash, that’s understandable given the amount of cash outflow that consists. In that case, try to defer your purchase and accumulate cash surplus as much as possible. This will help you by leaving a lesser amount to be financed by banks and ultimately lower outgo of interests. To conclude this, I would say debt is a great tool to use to meet financial needs if used judiciously.
Save and Invest for Proper Management of Personal Finance
Saving and investing is something you just can’t skip because of various reasons. We all must have heard that we need to save and invest for the future because the future is uncertain and to avoid any tough situations, you must have some emergency funds with you all the time. Ideally, emergency funds should be good enough to cover your expenses for at least 6 months without actually changing the lifestyle drastically. Put this much money in an account which you don’t use very frequently so that it would remain safe there. Your savings should be in liquid form or something which can be readily converted into liquid form. This was about saving, now coming to the investing portion.
Once you have accumulated your emergency funds, you should start investing in various investment avenues so as to grow your money and use that for specific goals that you’ve identified and that will require major cash outflows. Use different pools for different goals so as to have clarity over the funds. Here you can make a link with the point “postpone your purchases”, meaning thereby you can use market conditions to time your purchases and use your pooled money for the purpose rather than using debit and paying interests thereon.
Repay your Credit Upfront
Repaying your debts upfront entirely is essential for various reasons. First one is to avoid hefty interest payments, as banks charge as much as 35-45% of interest on your debt if you don’t pay that on timely. In case of missing the due dates for 3-4 times, you end up being trapped in vicious debt circle in which you are just paying the minimum required amount (with interest included) to keep up with that and the principal amount remains intact. Secondly, it also deteriorates your credit score which is not a very good sign. Hence, repaying your debt without fail should be a top priority before spending your money anywhere else.
Use renting option than to buy
At times we do require something for single-time use, you’re aware of many such examples. At that point, we have two options either to buy that, which seems pretty obvious or to take that on rent. Buying that stuff will at least cause an outflow of 5 times more than it would do in renting option. This is a very basic mistake we commit, mainly because of our ego. Just give a thought over it, you will perhaps use something for once and for that you are paying the whole of the price, it just makes much of sense. So, when such situations arise with you, think and act wisely, you can save a lot of bucks there.
Ignore Big Billion Day Sales
Well, this is an area where most of us lose our senses and end up buying that we don’t actually require, why? Because the online shopping company is offering huge discounts on products and that’s it. We Indians are so delighted to listen to the word “discount”. This indeed is not just a word for us, it’s an emotion in front of which we just surrender ourselves. Buying the stuff that you actually need on a discount is cool, but it doesn’t make any sort of sense to buy stuff that you don’t need even if those are available on discounts. Doing this deviates you from your monthly budget and after a very few days, you start cursing yourself. So, just stop making those companies richer by transferring money from your pocket to theirs, you are not helping yourself this way.
Update yourself Financially
Financial knowledge is a must these days. There are numerous hackers and looters around who are just waiting for your mistake and in case of a bit lack of diligence, they just snatch away your money in the blink of an eye. So, be diligent while dealing with your money. Learn about new investment avenues. Further, you should be having a sense of what’s going in the economical and financial markets. This gives you a clear understanding regarding using your money, be it for any purpose.
Reward yourself for Managing your Personal Finance
After going through all the above contents, you must be thinking that this guy is asking us to be a miser, well that’s not the case. This point is going to make you a bit delighted. Managing your finance doesn’t mean to not spend your money at all, that just can’t happen, it just means to spend your money wisely.
After following the disciplined budget for the entire month, it’s time to reward yourself in any manner that you like, e.g. you may go out for movie and dinner or perhaps shopping, whatever you like. It’s a way to keep yourself motivated enough for the upcoming month because you need to follow the same schedule for the next month as well. So, you’re done for the month by ticking all the boxes. It may appear a bit difficult initially, but after a months’ practice, things will seem to be easy going and hence that practice is worth it.
It’s all about doing something extra apart from your regular income-generating work. It is important due to two reasons. First, you can follow your passion which you have been missing since ages. And second, it provides another stream of income for you. This passion can be anything e.g. shooting videos, making travel vlogs, blogging, teaching etc. You just need to take out some time for your side hustle. You may be amused at me and say that you just don’t have time, but trust me if you start doing something that you like, you will make more time for that than you anticipated earlier.
Just to take it further, have you heard of a term “passive income”? Well, to define it I can say when you create something for once and reap benefits financially over a period of time, it’s said to be passive income flow. In simpler terms, it is about creating a water tap once that will give you water for a longer amount of time. So passive income is a way to manage your personal finance to some extent.
Understanding your finance is as important as earning money. You never want to be in a situation where you’ve run out of money and still you’ve expenses to meet. Hence understanding where your money actually becomes vital, it just can’t be overlooked. Hope this article will help you in some way to manage your personal finance. You may leave your comments and queries below in the comment section, many thanks for giving your time to this. Thank you.