Personal Finance. I am sure you must have heard this term at least once in your life.
But only having heard of it is not enough. Some of you may not even be sure of what it exactly means. Before we get into talking about the basics of Personal Finance, let's understand what it means - in simple words, personal finance includes managing your money in a way that you spend, save and invest it wisely. Buying insurance, paying taxes, taking a loan, using a credit card, all these things come under personal finance.
Now that we know what Personal Finance means, we can look into the basics. Personal finance is about your financial goals, like planning for your higher education, saving for a trip abroad or even for your retirement. To make the most of your income and savings, it's important to become financially literate so you can understand the difference between good and bad advice and make smart decisions.
Here are some things to keep in mind when it comes to personal finance. Having knowledge about these will build the foundation needed towards a sound financial plan.
Make a Budget:
A budget is important when you have a limited source of income, and you need to live within your means and save enough to meet your long-term goals. A 50/30/20 budgeting method is one of the easiest ways to build a budget.
It breaks down like this:
- 50% of your net income/salary (after taxes) goes toward living expenses, such as rent, other daily requirements, groceries, and transport
- 30% towards lifestyle expenses, such as dining out and shopping for clothes (this segment is optional: if you want to save more for your future, you can put it into savings; but if you have a big family, you may need it for your living expenses)
- 20% goes towards the future: paying off any loans, saving for retirement and for emergencies etc.
This is an ideal breakdown of your income, you can change it as per your needs, but this gives you an idea about how you should make a budget.
Open a Demat account and Start Investing:
Today, opening a demat account is not a difficult task. Online broking platforms like Groww, Zerodha or Kuvera offer Zero fees when it comes to investing in Mutual Funds and the process to open your demat account with them is also simple. All you need are your bank account details, your PAN card and AADHAR card, and in a few minutes you will have your account ready.
These platforms host a wide range of Mutual funds to invest in and also prove details about the particular fund, so you can choose which one to invest in based on your income and your goals. The best way to start investing is through SIPs or Systematic Investment Plan, where you can start investing with only ₹500.
If you follow goal-based investing, where you invest money to meet your goal, you can collect a large sum of money without feeling the burden. An example of goal based investing is, say you want to buy a car in 5 years and you will need ₹ 8 lakhs, invest a particular amount every month which will become ₹ 8 lakh in 5 years.
Create an Emergency fund:
We all have heard this from our parents, “Save money for the rainy day” but the question is how? In what proportion? And for how long?
It is definitely important to create an emergency fund for sudden and unexpected expenses like medical bills or even living expenses. The Covid-19 pandemic saw many people lose their jobs and only those who had created an emergency fund, lived to see another day.
To build an emergency fund, first make a rough calculation of your monthly expenses. Include rent, any EMI, food, groceries, fees etc. Don’t include expenses for shopping or dining out. These are the things that can be avoided. Saving for about three to six months worth of living expenses is ideally the best. The 20% amount that you have kept aside from your budget can be used to build your emergency fund.
Using Credit Cards:
Credit cards can become a debt trap if not used wisely. In practical terms, a credit card can be used to make cashless payments. They play an important role in establishing your credit rating and are a great way to track spending, which can be helpful when you make your budget.
Keep in mind to pay your credit card bills on time. This is especially important to build a good credit score. One of the fastest ways to ruin your credit score is to constantly pay bills late — or even worse, miss payments. One late payment can lead to another and before you know you are in a never ending cycle of credit payment, which is called a debt trap. To avoid this, try to minimise the use of credit cards, but make sure to avail all the offers (like cash backs) that are available when you make any big purchase.
Keep a check on your credit score:
If you ever want to take a loan, be it for a vehicle or a house; the first thing that is checked is your credit score/rating. So it becomes important to work towards having a good credit rating always. Once you make it a habit, it will always stay with you.
Paying your credit card bills on time is the most important factor when it comes to a good credit score. For other bills, you can always make payments automatic to avoid missing deadlines.
You can check your credit score for free on websites like Bajajfinserv.in, Bankbazaar.com. Credit scores are calculated between 300 and 850. Here's a rough way to understand what your credit score means:
720 = good credit
650 = average credit
600 or less = poor credit
So, aim at having a good credit score always and try to look at more ways to have a good credit score. Some of it include,
- Buying the best insurance plan as per your needs
- Take up good debt
- Learn about the basics of income taxes
These were some of the basics of Personal Finance that everyone should know about. Once you know the basics, you can build your knowledge on it. You will know the places to look at in order to gain more knowledge.