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Personal Finance

Personal Finance is a means of managing your finance effectively. It involves the financial management of personal resources by budgeting, planning, saving and keeping stock for the future. It could be at an individual or family level.

Managing finances is no easy task, more so when it-s on a personal level. To manage one’s finances effectively, one needs to be aware of all his investments including mutual funds, equity and bonds. They must also be updated with their account history across banks, banking products, loans and liabilities.

Personal Finance: How?

Get as creative as you can in helping your family and yourself to build a good personal finance base that you can bank on. Here's how you can do it over time:

  • Read offline: To understand personal finance better, it is good to read as much as you can both offline and online. Gather tips on effectively handling your finances through journals, book and encyclopaedias and keep yourself updated with the latest trends through newspapers and dive deeper into options of investment and finance planning.

  • Go online: The internet too is a store-house of knowledge and contains a number of articles, tips, guides and resources of financial planning. Browse through finance blogs, read digital publications and invest some time in reading pieces related to personal finance.

  • Track your finances: Maintain an Excel sheet of your profits, gains, losses, investments, banking details and estimated budget to begin with. This will help you keep a tab on your income versus expenses and will help you plan better. Additionally, you can bank on some portfolio trackers that help you calculate your long term capital gains.

Personal Finance: Why?

The scope of personal finance is vast. After all, personal finance is all about financial management wherein a person handles his finances by taking into account his budget and savings of the present to stock up resources for the future. The present and future are the two main life events that a person gathers his finances for. Handling finances from the start gives a bigger and better scope to save money for the life events of tomorrow. It keeps you at ease and helps you enjoy your today to the fullest. An efficient personal finance plan is a boon for the bright future of your family.

Aspects of Personal Finance

All the financial activities carried out on a personal level fall under the bracket of personal finance. For successful personal financial planning, you have to take into account your current income, chalk out short and long-term budgeting goals and needs, and devise a plan to match the desired financial security. This depends on a number of factors like income, expenditure, standard of living, lifestyle, goals and requirements.

The following products ought to be taken into account while dealing with personal finance:

  • Credit cards
  • Insurance policies
  • Loans and mortgages
  • Banking and savings account
  • Mutual funds, bonds, equity

The main aspects of personal finance are:

  • An assessment of the cash-flow desired
  • Taking up an insurance policy
  • Calculating and dealing with taxes
  • Investments and savings of all sorts
  • Planning for your retirement

Benefits of Personal Finance Planning

Plan your personal finance wisely for the sake of securing your future. Good financial planning will help you lead a hassle-free life today and stock up some amount for personal use in the future. Try involving your family in personal finance planning at the earliest in order to reap its benefits in the long run.

Some of the benefits arising from sound personal finance planning are listed below:

Evaluates your financial condition

Personal finance planning gives you an insight into your financial condition. This is achieved by budgeting and taking into account all the investments, income, expenses and savings in all your accounts and schemes. Budgeting forms the basis of financial planning as it helps in evaluating your financial situation, which, in turn, helps in assessing your financial health.

Gives profits from investment plans

A number of investment plans exist in the market today, and these are catered to an individual's needs and requirements. Depending on the money you have to spare in your current phase of life, you can choose an investment scheme that offers the best return. Choose from mutual funds, equity shares, public provident fund, bonds, unit linked insurance plans and real estate investments amongst many others. These are long-term investments and will give you good returns in the future.

Keeps you focused on your money goals

To be financially sound means to be aware of your financial goals. For this, you have to build your wealth gradually over time. At the same time, you need to keep a check on the financial path you have laid out for yourself. Keeping some money aside every month is a good practice and must evolve as a habit. Work on your personal finances to create a good profile and strong financial portfolio. Don’t ever let debt get out of hand.

Organizes your spending and savings

A huge chunk of the income earned every month actually goes away in a jiffy, in the form of taxes, monthly expenses, lifestyle, maintenance costs etc. It is imperative to put some thought into your monthly budget and keep some money aside. This money can be invested or saved efficiently through proper personal finance planning. A number of tools and apps are available today to jot down your earnings versus expenditure. Download them on your phone and keep a tab of every penny spent on the go.

Makes you aware what is going on with your money

Being aware of your financial situation gets half the work done. The other half happens when you act upon it. In order to sustain for life, you need to take your current life and retirement into account too. Develop easy-to-follow money-saving habits that are bound to go a long way. Use your credit cards responsibly, pay off your loans and debts on time and maintain a clean credit score. Additionally, keep a tab on your investments; close funds that are not profit-yielding and continue with those that offer promising returns.

Gives you control over your money

When you have your finances sorted, there is no stress, chances of financial crisis are minimal and you are ready for unforeseen events that require immediate money as well. Good personal financial planning helps you keep an eye on your financial goals and the other on funnelling your savings towards your retirement. When you have sufficient control over your own money, you are able to plan better, reap the benefits of your money-making tactics and lead a peaceful life.

Helps in building a better future

Your future lies in your hands and you are the only one who can make or break it. Therefore, take care of the health of your future by designing it right. Personal finance tools help you track investments, monitor expenses and slowly pave a path to a strong future. At the end of the day, there are two things linked directly to a sound personal finance planning - security and peace. Both of them go hand in hand provided you do it right.

Enables you to produce extra money

An investment done right is an investment for life. Therefore, you must invest wisely. Instead of confining yourself to a specific policy or plan, you must scatter your investments across different portals and insurance providers. Investment diversification is the key to success! Strengthen your portfolio to the best extent possible and secure your future with exponential returns. Take finance planning seriously and reap immense benefits of the compounding interest that you made possible.

Different Aspects of Personal Finance

There are different ways and means of taking care of your finances. The scope of personal finance is really wide. Sound personal finance planning takes many aspects into consideration. Some of these have been listed below. Based on your income, savings and requirement, some or all of the points below can be looked into. Some of these are the key areas of focus set by the Financial Planning Standards Board.

Financial Position

Personal finance helps in figuring out your financial position at that point in time. It is a means of assessing a person's worth by taking his resources, net worth and cash flow into account. All the assets and liabilities are considered for the sake of personal finance. Based on this, the expenses are subtracted from the income. The easiest way of going about it is to use a financial planner that helps in determining the extent to which personal finance goals can be achieved as per the timelines set.

Adequate Protection

The question that bothers most people is that how much coverage is enough coverage? This depends on the values one assigns to himself in terms of the property he owns, funds he manages and investments at stake. Additionally, liabilities, family protection and life coverage should be taken into account to determine the amount of cover needed to continue with the same lifestyle and build a corpus for use in the future. Pick up an insurance policy that offers adequate coverage with low premiums and maximum benefits.

Retirement Planning

Retirement planning is the planning for one's retirement. It is the best means of saving money for a life after employment where the person has no regular source of income. Making the right retirement decisions go a long way in securing your future. When it comes to handling your personal finance, this is an aspect that has to be considered. Start early and keep some amount aside for your retirement fund. Avail plans offered by your employer or open an IRA (Individual Retirement Account) which acts as a savings account with big tax breaks.

Annuities

Annuities are helpful financial products that help in generating a fixed set of payment that the annuity buyer can use as a stream of income in the future. It could be in the form of pension payments, depending on your requirement. In some cases, it incorporates regular deposits to the person's savings account. Clearly, it serves as an added income when you need it the most. Annuities are of two types: Fixed, where regular payments are given to the annuitant; and Deferred, where cash flows are received at a later date depending on the performance of the investment during the accumulation phase.

Estate Planning

Estate planning, as the name suggests, involves planning the disposition of assets, that a person has, after his death. Depending on their personal preference, discussion with family members etc., he or she can choose to dispose off the assets, leave it with a trusted family member or donate it to some charitable groups. This requires advance planning, as there are taxes to these assets even after the death of the individual. In order to avoid these taxes, one can think of distributing or passing them down to their heirs.

Banking and Loans

A normal working individual’s income is never enough to support all his needs. There are unforeseen events that take place in one's life. Sometimes, the property or car they want to buy is beyond their reach but can be handled in instalments. For this sake, banks offer loans like personal, house, car etc. to help an individual fulfil his dreams with his own money stretched over an extended period of time. While on one hand, it becomes essential to sign up for a loan or two at some point of time, on the other hand, one must not forget to open an investment account or savings account with the banks to safeguard himself for the future.

Budgeting

Budgeting is the most crucial aspect of personal finance. It helps a person create a plan for spending his or her money. It makes them in-charge of their own spending, thereby helping them set financial goals for the future. If finances are to be planned right, they ought to be made in a format that allows one to weigh their income versus expenses, in order to track their financial progress and direct a portion of their income into a saving or investment fund.

Credit and Debt

Keeping a tab on the credit and debit is like keeping an eye on one's assets and liabilities by taking every possible aspect of your finances into account. Since assets include liabilities and equity, they cannot be ignored. After all, credit and debit balances are used by accountants to make financial statements. This gives an insight into your earning and spending pattern while keeping you aware of the lapses and misses that should be given better consideration.

Taxes

As far as personal finance is concerned, nothing pinches anyone more than paying their income tax. It entails a huge sum of money that goes out of one's hand every year. It is, thus, important to take taxes into account while planning your financial goals. If planned wisely, a number of tax deductions, under different sections, can be availed if the investments are done and claimed in the right manner. Various sections of the Income Tax Act, 1961 help in reducing the tax burden on an individual.

Getting started with money

The biggest question that everyone faces is, "where do we begin"? This single biggest challenge has to be addressed at the start of personal financial planning. Although it sounds challenging, planning for your personal finance is not that difficult. There are a number of steps that a person has to take to keep their income steady, to make their earnings sync with their expenses and keep the ship sailing even after retirement. Start small, start wise. Diversify your investment portfolio, spend your income wisely and save some money to build a corpus for the future. Take the help of financial planning tools if you need to.

Car Insurance and Loans

Personal finance involves a 360-degree approach to financial planning and sustenance. An individual has to take every aspect into account, including unforeseen expenses, budgeting for assets and shelling out a huge chunk of money from time to time. One such aspect is that of car insurance and loans. Cars can be bought on loans but buying a car might be easier than maintaining one. Moreover, unfortunate events like theft, car crash, injury due to a car accident etc. require immediate attention and lots of money. To keep yourself and your car covered, take up a suitable car insurance plan with the riders that are beneficial.

Personal Finance Planning Process

Personal finance planning entails the management of one's own finances (family members included). It is an elaborate process and can be successfully implemented over time. It requires patience, discipline and a tab on money-spending patterns. The points below sum up the personal finance planning process.

Establish Financial Goals

In order to plan your personal finance better, it is important to establish your financial goals. To do this, you need to have a clear picture in your mind about what you want versus what you actually need. To begin with, you can create doable goals and churn out timelines on achieving them. Start by framing some objectives and strive to stick to the financial goals laid out by you. Take all your savings and investments into account. Engage in different parameters associated with financial risks such as risk management and debt management. Finally, think of all your liabilities, take your lifestyle into account, keep some money aside for the future and categorize your goals into short and long-term ones and pave your path to financial independence.

Gather data

Break down your finances into a number of components. Scoop out the details of every investment you have made, real estate deals you have sealed and money you have earned so far. Jot them down and compare data to strengthen or improvise on your financial goals. An important consideration to take into account would be the risks associated with your finances. Note the past trends of your financial portfolio and keep all the related documents handy for reference. Any and every banking transaction, your credit rating, CIBIL score, on-going loans and property documents must be gathered together. Deep dive into your profile to understand your current financial situation and sync your personal and financial goals.

Analyze the Data

After gathering all the relevant information on your finances, it is important to analyse your financial data. This analysis will help you understand the good and bad financial decisions you have made so far. It will give you an insight into your bad investment decisions and help you set the line straight. An important aspect worth deep-diving is that of debt. Paying off old debts and swearing not to get into one is a tough step that ought to be taken. Think of ways to pay off loans, clear debts and remove traces of bad debts for the future. On the other hand, assess your financial position to strengthen your portfolio and widen your range of investments. Try ratio analysis as an approach to financial planning and take the four important ratios into consideration, namely – liquidity, debt, financial security and performance ratio.

Develop your Financial Plan

Think of your end goal and draft a financial plan to achieve it. On the way, cover every small step of the investment decisions you have ever made. Take your past financial activities into account and make an informed decision. Then, set up a budget to cater to your financial goals. Take all the constituents of your finances into consideration and set up a budget with realistic goals and expectations. Keep some extra space for unforeseen expenses and take your risk income into account. Learn from your mistakes. You might not be able to plan the best and perfect budget at one go, but you will eventually get there as time passes.

Identify Alternative Courses of Action

When it comes to personal finance, there is no yardstick to measure how right or wrong you have been at financial planning. But there are ways to determine your financial position and strength. Based on the good and bad experience of the past, you can make a sound financial decision in the present. Take help of some tools and use financial planners to assist in the process. Download apps to track expenses, run searches to find the best return-yielding policy and research alternate accounts that can be opened. Keep your goal tolerance and risks in the mainframe and try the trial and error method until you are stuck with one that really suits you. Think of additional sources of income, take up a loan to ease out your financial burden or simply cut back on expenses to save a little extra amount every month.

Evaluate Alternatives

When one doesn't work, don’t lose hope; try another. If you are unable to save a specified amount every year, start putting some monthly amount aside. Gradually increase your income pool and extract some extra savings per year. Evaluate all the alternatives very carefully – is it worth investing in mutual funds, should you diversify your investment portfolio further, is it too much to handle, are you running into losses should be some of the questions you ask yourself. Monitor all your financial decisions regularly and peer into the ones that don't prove beneficial. Replace or remove them and stick to sturdier processes.

Revise Your Plan

A plan is not considered successful if it is not monitored closely. Similarly, the process of personal finance planning is incomplete without a review and evaluation. Any changes to the process can be made at this step. It is important to scan through the mechanism, churn out the effects it produces and weed out the unnecessary or unachievable targets that had been set at the start. The dynamic process of personal finance planning enables you to make tweaks and moderate its individual steps at every phase. Revisit your plan and keep the ship sailing.

Personal Finance Planning Tips

Personal finance planning is no child's play. It comes with a lot of effort and discipline. Consistency of planning is key! It is important to jot down every small finance-related detail and keep receipts, bills and relevant documents handy for completing your personal finance diary on a weekly, fortnightly or monthly basis.

Start Early

Planning your personal finance at an early age is the best way to take it forward. If you start young, you have more time in hand to invest in long-term policies. You end up benefitting manifold from the same policies that you give lesser returns when you grow older. Think of it as a marathon that you have to complete from the start to the finish line. The medal you receive as the reward is the return you get on your investment. Start small, but start from the beginning, increase your savings gradually, and build a corpus to last your post-retirement life.

Make a good budget

Budgeting is the key to long-term finance planning. It goes a long way in analysing your income and expenses, keeping a tab on excess expenditure and tracking your long-term financial goals. It all starts with making a good budget plan. Take different tax relief schemes into account and set some money aside for it. Diversify your investments rather than banking on just a single policy or investment plan. Think of parking a little money in the form of fixed deposits or recurring deposits, or simply set aside a sum for mutual funds and investments. Also, remember that a sound budget is one that does away with debts, so clear your dues and start afresh.

Maintain a five-year plan

Maintaining an investment strategy is imperative for long-term sustenance. It helps in achieving your personal finance goals and planning month-on-month for the years to come. Categorize your financial plans into short and long-term ones. If this sounds too cumbersome, simply think of some achievable five-year plans. Make a sturdy goal sheet and start with these headers: income, monthly expenses, financial goals for years 1-5 and a tab for unforeseen expenses. Based on this, maintain a column for savings. Then, start investing in mutual funds, shares, purchase bonds, sign up for insurance policies etc. and monitor the progress from time to time.

Create an Emergency Fund

Keeping a sum aside for a rainy day is never a bad option. Personal finance, if planned right, can cover you for life. Good planning takes care of your needs and requirements, while helping you save for the future as well. Adequate and timely planning doubles up as a contingency measure and helps you create a fund that can be used in case of emergencies. Take all the assets, liabilities and savings into account and plan for your premature death too. This will include the funds you need to create for the security of your family.

Look out for Your Credit Score

A credit score is a score that determines your creditworthiness. It is important to maintain a healthy credit score as it reflects your financial history and helps you in getting loans or credit cards easily in the future. Wean away from the fear of loan rejections by maintaining a good credit history from the start. Your credit score lies in your hands. Steer clear from defaulting on credit card and other bill payments.

Simplify Your Life

With thousands of stressors bombarding you every now and then, take care of the one that bothers you the most – personal finance. Everything else will fall into place. Once your money woes are addressed, your life will be far more simplified and sorted. Taking some time and money out today can save a dime and a lot of time in the future.

Save regularly

The best way to secure yourself financially is to save regularly. Start small and keep increasing the amount of savings every year to build a good corpus for the future. Try to balance your expenses with the amount you get in hand every month. Try to maximize your retirement savings and reallocate your investments based on their performance. Devise a risk-free strategy and review your personal finance plan every now and then.

Personal Finance FAQ

What do you mean by financial practices?

Financial practices are just traditional practices and methods that support in carrying out budgeting, reporting, accounting and other activities relates to finance. They help in creating a strong and sturdy financial management system.

What is personal finance software?

A personal finance software is a software that helps in tracking accounts and budgeting. It helps a user keep a tab on his money, be it cash, income or expenses. Many such software for personal finance are designed to work in the computer and on phone for financial goal-setting.

How do you finance money?

You can finance money in many ways. You can try directing some amount into a savings fund or long-term investment, taking loans from banks, signing up for credit cards, picking up a retirement policy, take up a good annuity scheme etc.

What are the six steps in the financial planning process?

The six steps in the financial planning process are:

  • Determine your current financial situation
  • Develop financial goals
  • Identify alternative courses of action
  • Evaluate the alternatives
  • Create and implement a financial action plan
  • Re-evaluate and revise the plan

What are the basic principles of finance?

The basic principles of finance are:

  • Risk and return: Higher profits and returns are possible by taking higher risks
  • Time value of money: Money that is received today is more valuable than that received in the future
  • Cash flow matters: Incremental cash that is received, rather than accounting profits, drives value
  • Market prices: The product market prices are generally right and efficient
  • Unforeseen future: Personal finance takes unforeseen events into account

What is effective financial management?

Effective financial management is the means of maintaining accounting records along with planning, controlling, organizing and monitoring the financial resources to achieve the set goals. It makes use of a sound organizational plan.

How much does YNAB cost per month?

The software YNAB (You Need A Budget) costs approximately Rs 460 per month.

What are good money management skills?

Good money management skills are those that help you understand your earning and spending pattern and save money in the long run. Some of these include budgeting, maintain a personal finance log, making financial goals, curbing unnecessary expenses and monitoring your savings.

What is a personal financial plan?

A personal financial plan is a plan that helps in the management of your personal finance in order to save money, plan a budget and cover unforeseen financial risks. It aims to make you financially healthy and achieve your financial goals, if any.

What are the factors that affect personal finance decisions?

Your emotions, personality, family members, past experience, health, requirements and needs are some of the factors that affect personal finance decisions.

How do personal and economic factors influence personal finance planning?

While personal factors affect the mental make-up of a person and influence his or her style of investment, budgeting and savings, the economic factors revolve around his judgement of the market, financial transactions and debts, if any.

What is the role of forecasting in financial planning?

Forecasting helps in judging the current financial condition and mapping your financial journey by taking risks and unforeseen events into account. It prepares an individual mentally and emotionally for bearing the consequences of his financial decisions.

What is AFN in finance?

AFN means Additional Funds Needed. AFN = Projected increase in assets – spontaneous increase in liabilities – any increase in retained earnings

What is included in spontaneous liabilities?

Accounts payable and cost of goods sold are included in spontaneous liabilities.

What is a spontaneous asset?

It refers to the assets of companies which are automatically accumulated due to the day-to-day business of the company and includes inventory, accounts receivable etc.

What is EFN in finance?

EFN stands for External Financing Needed, wherein additional funds to be raised, for supporting forecasted sales levels, are identified.

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