Personal Finance is the management of money and finances by an individual or a family, including budgeting, planning, investments and savings. It involves foresight and risk management at a personal level.
With the threat of inflation, the instability of the world’s economy, and the significant increase in the cost of living, one of the biggest problems the majority of people face, and more often than not- struggle with is money management. Personal Finance, by definition, is unique to each individual’s needs. And although this may seem tedious and cumbersome, Personal Finance Management is quite easy to practice. There are age-old and tested methods to manage personal finance and if that isn’t your thing, then there are technological alternates for the same- through smartphone applications, and various personal finance software that is easily available in the market.
Here are a few ways through which you can manage your finances:
Set financial goals
Financial goals are the targets or achievements that you set for yourself on how you want to spend or save your money. Financial goals aren’t uniform for everyone and need to be set based on the individual’s priorities and requirements.
Financial goals can be long-term or short-term. Short-term goals include paying your rent, bills, everyday needs, holiday shopping, etc. Long-term goals include saving for your retirement, vacation, a car, a house, college, etc.
Setting financial goals is essential to keep you from living ‘pay-check to pay-check and help you pan out and plan for what is important to you. It is, of course, important to keep track of these goals, monitor your progress regularly and not allow yourself to be bogged down by immediate impulses.
Also, when you keep your goal in mind and work towards a bigger picture, it is easy to cut down on ‘impulse buying’. For example, if you’ve decided to save a percent of your salary on buying a car at the end of two years, then it’s easier to say ‘No’ to impulsive spending on that new dress or those books you’ll never read right away. Personal finance software helps you deciding these goals and keeping a timely check to see if your expenditure is aligned with your goals.
A Budget is understanding your income and expenditure and making a plan on how to spend money, and save money more responsibly. It is an important aspect of personal financing as it governs how you will utilize your money over a set period. Budgets are important in achieving your financial goals and although budgeting may seem difficult at first, it gets easier over time.
Budgets are unique to each individual based on their understanding of their income, revenue, and needs. A simple way of budgeting would be the 50/30/20 method. According to this method, 50% of your salary goes on the essentials- rent, utilities, groceries, and any other monthly needs; 30% for lifestyle expenses like clothes, makeup, shoes, games- your wants; and the remaining 20% as savings to fulfil your financial goals.
At first, it isn’t easy to make a budget and stick to it, and if you need help managing your finances, there are various personal finance software available in the market that helps tailor your budget to your lifestyle.
A popular personal finance software currently available in the market to help with budgeting is Mvelopes by Finicity. This software creates a secure link with your bank accounts and helps you plan a budget based on your deposits and credits from the bank. You can assign amounts of money to specific areas and it helps you monitor those expenses for that month.
Do not leave bills pending
An important mantra to remember while managing your finances is “Spend less than you earn”. This may seem like the most obvious thing, but in the era of installments, credit cards, and payment apps, it’s easy to lose track of your spending. This often leads to credit card bills and financial responsibilities that often leave us in debt.
It is crucial to remember that credit isn’t money that we own, rather, it is a type of loan that we take from the bank. If we spend more than we earn, then the bills add up every month, and what at first seemed like a small amount builds into substantial debt.
The best practice to use your credit card responsibly is to track your expenses and pay off the full amount at the end of each month. This can be done either by writing down your expenses each time you swipe or by using personal finance software such as Mint by Intuit. This tool is an all-in-one budget builder that keeps track of your expenditure and suggests suitable budget changes. It also helps you keep track of all your bills so that you never miss a payment, and it monitors your credit score.
Always plan for an emergency
“Prevention is better than cure” can apply even to financial emergencies. It may sound pessimistic to think of these situations, however, financial emergencies can be easily handled with the right preparation.
A few examples of financial emergencies include- the loss of employment, medical emergencies, repairs for your car or your house, natural calamities, etc.
Saving money for approximately of three to six months is generally considered a good safety net in case of such emergencies. While saving money, it is ideal to reach the “Rainy Day” goal and then continue to save for other financial goals.
Another good way of handling financial emergencies is through insurance. Insurance offers financial protection, and to an extent, reimbursement against losses, to an individual (or company). It is, therefore, very important to invest in a good insurance policy.
Manage your debt
A debt is when you owe a person or an entity a sum of money. Although it is considered a good practice not to borrow money, not all debt is bad and some of it is unavoidable- a student loan, for example, or a mortgage.
Acquiring a debt over impulse spending (a credit card debt) or over something that will not benefit you or will lose its value (car loan) in the future is considered a bad debt. This is the sort of money you don’t want to spend.
Student loans, mortgages or investing in a business are examples of good debt. Of course, keep in mind that it is better to weigh in the pros and cons before dealing with any sort of loan.
An investment is something that is acquired to increase revenue or generating income. An investment is something that requires resources today (time, money) that will pay off with a greater profit in the future.
A few investment options include:
The stock market
This is one of the most difficult options on this list. Investing in stocks may not be for everyone. It is difficult to determine which stocks to invest in, when to buy them and when to sell them. Although in a long-term investment, stocks may provide a good return, the probable risk of losing a considerable amount of capital is also high.
Investing in real estate gives returns in two ways- the rentals and the resale value of the property. There are very few risks involved (except if the property was not purchased through the approval of proper regulatory authorities). The rental value and the resale value of the property depending on the location and the amenities offered.
Possessing gold has safety concerns and purchasing it may be difficult due to its high cost. However, the gold rate constantly increases in the market, making its resale value much higher than the cost spent on purchasing.
- Making a fixed deposit in a bank
In India, making a fixed deposit in a bank may be one of the safest options. Money is deposited in the bank against a fixed interest that can be recovered on maturity.
Know what you’re worth
Knowing what you’re worth, or your net worth will help you make modifications to your budget and help you manage your finances better. Your net worth is basically how much money you are worth, or how much money you have when you add up all your assets and then subtract all the liabilities.
A simple way to calculate net worth would be:
Net worth= Everything I own – Everything I owe
By making a list of all of your assets- such as money, investments, real estate, jewelry, cars, and anything else of monetary value, and their approximate total; versus a list of all your liabilities- such as loans, debts, mortgages, bills, and their approximate total; you will be able to determine your net worth.
If you have a positive net worth, then your finances are healthy and you can continue to work towards meeting your financial goals and increasing your net worth even more. However, if you have a negative net worth, then you may have to cut down on your expenditure and make changes to your budget accordingly. It is important to keep track of your net worth as it helps manage your finances better.
Money may not be the key to happiness, but it does help. Managing your personal finances helps you lead stress-free lives. It helps plan ahead for emergencies and save to follow your dreams- whether it’s that dream home, going on that perfect vacation or getting that degree. It is always important to manage your money to live the best life and there are always personal finance software to help when you can’t keep a track of your finances.