In the simplest terms, Personal Finance is everything we do with our money — be it earning, spending, planning, or investing the money. Yet, a lot of us tend to focus on only certain aspects of that and not think about the big picture by bringing all money-touchpoints into a single plan.
Let us look at the different pieces of the Personal Finance puzzle at a high level.
Income:
Income is the basic building block to piece together the puzzle of Personal Finance. When
we talk about Income, a lot of us primarily focus only on our Salary and assume that is all we have to plan for all of our Financial Goals and future. By doing so, we limit the ability to grow our money to the extent of what we can earn. This often creates a never ending cycle (“rat-race”) — earn more, spend more time at office, end up having less personal time.
What if we can create a plan to get out of this “rat-race”? What if we can create a plan to diversify our Income source?
In fact, a lot of successful people rarely rely on their primary source of Income. They create multiple Income sources so that they are not fully dependent on a single source of Income.
The average Millionaire, typically, has multiple sources of Income — Interest Income, Dividend Income, Earned Income, Royalty Income, Rental Property, Capital Gains among others.
During tough economic conditions, like the pandemic today, they are able to weather the storm with less worry, while a lot of us have a constant fear of loosing our job and the only source of Income we have.
It is important to work on a plan with achievable goals that is considerate towards the time and resources one can commit to.
Budgeting:
Budgeting is probably the most common term people associate with when talking about Personal finance. However, budgeting is a part of Personal Finance, albeit one of the most critical one. Most of us start creating budgets by listing all the expenses first and then list the Income and determine if that is enough. With this approach, it is most common for someone to have a budget that does not leave much behind for Savings or Investments.
The philosophy of the rich and the poor is this: the rich invest their money and spend what is left. The poor spend their money and invest what is left. ― Robert T. Kiyosaki, Rich Dad, Poor Dad
Building a habit to prioritize Savings and Investments will automatically make us reconsider any wasteful expenses and rather motivate us to treat them as Goals.
Spending to achieve a Goal is more fulfilling than the guilt when splurging on a gadget that stretches the monthly Budget.
Savings:
Continuing our thoughts from Budgeting, Savings is very important and probably should take the highest priority when planning for Personal Finances. Pandemic and the resulting lockdown, restrictions and hardships has put a strain on individual personal finances. Taking cue from the current situation, it would be prudent to start putting some money towards an Emergency or a Rainy Day fund that will help support in such times of uncertainty.
Building a rainy-day fund during good times may not be popular, but it can pay off during the bad times.
A general rule of thumb is to keep six (6) months of expenses in the Rainy day fund to fall back on during times of crisis. This will help to focus on the crisis at hand and not worry about managing the monthly budget.
Investing in a Fixed Deposit, Recurring Deposit or a Liquid Mutual Fund earns us interest while keeping money easily accessible during emergencies.
Investments:
Until now, we mainly focused on some good practices with money for our immediate needs. However, the most detrimental, and frankly a highly underestimated, aspect of Personal Finance is Investments and how following the right strategy can let one become Financially Independent; in fact there is even a concept called F.I.R.E. (Financial Independence, Retire Early) that is gaining popularity amongst Millennials. Understanding a simple principal of compounding clears a lot about how investments can help you grow your money and achieve F.I.R.E.
To understand compounding, lets say you invest ₹ 20,000 /month in an Equity Mutual Fund with an average return of 10% per annum, the total amount you will have in 10 years will be approximately ₹ 41 Lakhs.
Sometimes, in our daily struggle to survive, we don’t look at the bigger picture and miss out on what disciplined Investment could have achieved for us. It is also important to Invest to secure the Financial future of our loved ones for any unfortunate events. Determining the adequate coverage and finding the right Insurance will ensure that our loved ones will have one less thing to worry about when we aren’t with them.
In conclusion, it is important to note that Personal Finance is not simply Budgeting or Earning more money or Investing alone; rather its a combination of these concepts to manage and create a plan for a secure future. A lot of FinTech apps are focused on simplifying investing for millennials or budgeting; however, there is still a big gap in connecting these dots that lead towards F.I.R.E. To bridge that gap, there is a need for an app or a platform that takes the holistic approach of providing the user with the ability to get a 360 degree view of their Finances for Planning and Management.
A good financial plan is a road map that shows us exactly how the choices we make today will affect our future. ― Alexa Von Tobel
Take control of your Personal Finance Planning and Wealth Management, Download and Install Finzard — Your Personal Financial Wizard from Google Playstore.
Comments