No matter how much you earn, mismanaging money can lead to long-term stress, financial instability, and missed opportunities. Without a clear roadmap for your income, spending, saving, and investing, you may end up living paycheque to paycheque, without a safety net for tough times. That’s why understanding personal finance is crucial.
What is Personal Finance?
Personal finance refers to how you manage your money to meet your financial objectives and secure your future. It includes budgeting, saving, investing, managing debt, planning for retirement, and protecting yourself with insurance. Personal finance helps you understand your income and expenses, so you can make better decisions about spending and saving. It also prepares you to handle emergencies and major life events, such as buying a home or funding education.
Components of Personal Finance
To understand the importance of personal finance management for beginners, learning about its following key components is crucial.
Income
The journey to personal finance starts with income, which can be fixed or variable. Income includes your salary, business earnings, rental earnings, freelance payments, dividends, and any other cash inflows. You need to categorise your income into fixed and variable sources so that you can plan your expenses accordingly. Fixed income helps in budget forecasting, while variable income demands more careful planning.
Budgeting
This is the very first piece of financial advice for beginners. Budgeting helps you avoid financial chaos. Start by mentioning the category-wise limits, such as baby, bills, home, medical, clothing, and so on. Now, list your monthly income and break down your expenses to place them into categories.
You may also assign fixed amounts to each category and ensure your total expenses do not exceed your income. This habit helps you spot overspending areas quickly.
Emergency Funds
Without an emergency fund, any unplanned event, such as job loss, illness, or a family emergency, can disrupt your financial stability. Build an emergency reserve that can pay for at least six months of your essential expenses, such as rent, groceries, utility bills, and EMI payments. If your monthly expenses are ₹30,000, then aim to save ₹1.8 lakh in a separate savings account or a liquid fund.
Remember, although the money is easily withdrawable, it should not be readily accessible for impulsive spending. To avoid this, automate your contributions and, if possible, increase them whenever there is a rise in your paycheque.
Insurance Planning
Today, insurance is not a luxury but a necessity. Ensure you have health, term life, and vehicle insurance. For instance, if you are married with dependent parents, consider investing in a family floater health coverage that not only provides an adequate sum insured but also includes riders, such as critical illness cover, restoration benefits, and OPD cover.
Term life insurance offers a financial cushion to your family when you are no longer around. The coverage amount should depend on your existing liabilities, outstanding debts, and whether you are the sole breadwinner of your family.
Regarding vehicle insurance, third-party liability cover is mandatory, but opting for comprehensive cover is advisable as it reimburses for vehicle damage and covers injuries and property damage caused by the insured car to third parties.
Debt Management
Not all debt is harmful, but mismanaging it can trap you in a series of repayments. First, differentiate between productive debt, such as home loans, and destructive debt, like high-interest credit cards. You must calculate your debt-to-income ratio to understand if your borrowing is within a safe limit.
Always pay your credit card dues in full to avoid paying over 40% interest annually. For existing debts, consider negotiating lower interest rates or using a balance transfer if it saves you money.
Investment Planning
Just because someone else made money in cryptocurrency, stocks, or options trading does not mean you will. Never invest in anything you do not fully understand. Always ask questions like: What is the risk involved? How does this investment generate returns? Is it regulated? What are the tax implications?
Make sure the investment instrument you choose outperforms inflation. For long-term wealth accumulation, SIPs in equity mutual funds can be beneficial, particularly in schemes with a sound track record and experienced fund managers.
Tax Planning
Tax planning is not just about saving money at the end of the year; it is a continuous process. If you fall under the high-income tax bracket, choose the old tax regime and make use of sections like 80C, 80D, and 24(b) of the Income Tax Act.
Section 80C allows you to claim deductions of up to ₹1.5 lakh through investments in instruments such as EPF, ELSS, life insurance premiums, and home loan principal repayments. Section 80D provides tax benefits on health insurance premiums, ranging from ₹25,000 to ₹1 lakh, depending on your age and that of your dependent parents for whom you have purchased the medical cover.
Section 24(b) offers tax deductions on home loan interest payments. It is important to keep digital records of all proofs for smooth filing and to avoid scrutiny.
Retirement Planning
Many people in India delay retirement planning because it seems too distant. However, the earlier you start, the more power compounding will have. Estimate how much you will need post-retirement by accounting for inflation, lifestyle changes, and life expectancy.
Build a retirement portfolio using options like PPF, EPF, NPS, and mutual funds. Do not depend entirely on pensions or family support. Periodically review your corpus, especially if your income or expenses change.
Goal-Based Financial Planning
Rather than saving randomly, link your money to specific goals, such as purchasing a house, supporting your child’s education, or taking a family vacation. Break down each goal by amount, time frame, and risk tolerance.
If you are investing to meet short-term goals, say less than 3 years, avoid market-linked instruments and opt for recurring deposits or debt mutual funds. For long-term goals where you have more than 5 years, you have enough time to tolerate more volatility, so equity investments make sense.
You must also use goal calculators to know how much you need to invest monthly. Keep each goal in a separate investment folio to track progress clearly.
Estate Planning
Estate planning is often ignored in India, but it is vital for passing on your wealth smoothly. You should create a will clearly stating how you want your assets to be distributed. If you have minor children, name a guardian and mention asset allocation for them. Ensure nominations are updated in your bank accounts, mutual funds, and insurance policies. Consider creating a power of attorney in case you are unable to manage finances due to health issues. For large estates or multiple heirs, explore setting up a trust.
Conclusion
Learning personal finance is important to secure your and your family’s financial future. The process involves money management, budgeting, building emergency funds, and protecting yourself with insurance. You must also focus on managing your ongoing debts and avoid taking on new ones unless necessary. Try building real wealth that can outperform inflation and ensure the investment not only meets your current objectives but also considers retirement.
Lastly, consider estate planning to ensure a smooth wealth transfer. All these small but sensible steps can help you overcome life challenges.
Now that you are well-versed in personal finance, take a step today to build wealth for tomorrow with Kunwarji Wealth.
