Personal Finance — What And Why

“Just earning money is not enough in the 21st century. You need to smartly manage your money by saving today and investing for tomorrow”. By practicing personal finance smartly, you will be able to handle budgeting, banking, insurance, loans, investments, retirement planning, tax planning and much more.

The nuts and bolts of Personal Finance

• All of us would love to be in control of our finances. In this blog, you will learn the What and Why of personal finance. This will help you move a step closer to being good at managing money. Our lives are incomplete without money. This is the truth. You may argue that life is bigger than money. But the sooner you accept it, the easier it becomes to lead a financially happy life.
• Left on its own, money can be a bad master. You may find yourself working too hard for too little money. This is where personal finance comes in. It teaches us how to manage money in an efficient way, even if you earn less. Simply put, personal finance helps you to become the master and use the money to do your work.
• You do not need to be super-rich to have a good financial life. In fact, the amount of money you earn has little to do with in terms of deciding whether you are an expert in personal finance, or not. It is all about managing money wisely.
• You may be earning ₹ 10,000 or ₹ 10 lakh a month, but more income is no guarantee of you managing your finances well. In fact, many high earners suffer from the same money problems that those with lower incomes have.
• If you think, you are not doing a great job at money management, congratulations! Surprised that we congratulated you for accepting that you don’t manage money well? Yes, we did, and for good reason too. The first step in attaining expertise in personal finance is to acknowledge the fact that you are not doing it well enough.
• Like in life, solutions in the personal finance field work only if you accept there is a problem. Acknowledging a problem opens your mind to changes.
• But what if you are already good at money management? You can still continue reading this blog. You may find tips and tricks that will help sharpen your personal finance skills even better. There is always room for improvement.

What is Personal Finance?

• Personal finance is about meeting personal financial goals. Your financial goals should be clear and simple. It may be saving money for overseas vacation with family in 6 months. It may be doing a 25% down-payment for your dream house in 12 months when you take the home loan. A financial goal can also be far away like building a ₹ 50 lakh corpus for child’s higher education, or having a lifelong pension even if you are a private-sector employee.
• In football, one goal rarely ensures a win. In our lives too, there are always different financial goals that are running simultaneously. It is never about doing one thing at one time. So, you will have to save for a foreign trip in a few months, arrange funds for home loan down payment and also do something about your child’s future financial needs. Like a big railway junction, financial goals like trains, criss cross all the time. It is your job to see everything happens smoothly.
• The best (and also the worst) thing about financial goals are that they are about money. So, in essence, achieving these goals depend on your income, expenses, savings and investments. If you come up with a good plan that balances these things, you are set for success.
• But as you know, it is never easy to make a superb financial plan. If your income is good, your expenses tend to get out of control. When you expenses are on a tight leash, you are saving too little to invest. Very rarely would you find an individual who consistently earns a lot, and spends very little. In the real world, there will always be financial constraints. For instance, the month you will get the salary hike will coincidentally see a big expense. Such things will always happen. Also, there are your impulse-driven financial decisions that are fueled by your desires.
• To make the most of your income and savings it’s important to avoid bad decisions. If you can distinguish between good and bad advice and be disciplined about your decisions, you and your family’s financial future will always be secure.
• Personal finance comprises knowledge about 8 core areas. They are budgeting, banking, insurance, loans, investments, retirement planning, taxation and estate planning and will.

Why Learn About Personal Finance?

We live in a world where instant gratification is the norm. People around us want to experience things now, right now. They don’t want any delay be in a train journey, food delivery or when it comes to investments. Learning takes time. But what if you do not learn? The answer is easy — you will end up making mistakes. The cost of those mistakes can be very expensive in terms of your financial health.

Below are the reasons why you should learn about personal finance.

• To Be Financially Literate — India is home to a billion people. A growing populace is educationally literate. But the high number of financial scams and victims tells us that financially our knowledge levels are poor. We understand concepts like return and profit, but do we know that return comes together with risk? Unfortunately, literacy and financial literacy are not the one and same thing. Financial literacy is about making informed and effective decisions with all of financial resources. For making successful use of financial services like banking, insurance, mutual funds or stocks, you need to understand the basics of managing money. Personal finance knowledge is essential for enabling people to make the right financial choices.
• To Live Within Your Means — We dream of a big car, a palatial house, annual overseas vacations, expensive clothes and shoes. Our dreams are as big as the sky. There is nothing particularly wrong in dreaming about a good life. Aspirations make a man! The problem starts when we want to ensure all our dreams become reality today. In a world driven by money, living within your means is important. Every decision must be weighed and its pros and cons should be studied. For the average middle-class family, affordability is a big factor. If you do not live within your limits and let your emotions rule, you will be forced to borrow. Loans are your future income that you have borrowed today. Loans may help you bridge financial gaps, but they have to be repaid, hence creating a future liability. Once you gain knowledge about personal finance, you will naturally try to live a life that suits your income and expenses. Additionally, you will become disciplined in your money management since you would understand financial matters much better.
• To Save And Invest — Savings and investments are an integral part of our personal finance. Merely earning money cannot solve problems. As a country, we have been big savers. Unfortunately, a lot of those savings are stored in idle assets like gold and non-financial assets like real estate. Some of us, till today, prefer to ‘invest’ in savings account of banks. Keeping money in savings account is saving, but it is not the best investment. Why? This is because the returns generated from savings bank account are very low. If you consider inflation, the returns can drop to zero or even negative. Money kept locked in gold and real estate used to generate returns decades ago, but today they are a shadow of themselves. Many people do not understand the difference between saving and investing. As a result, they are forced to live with poor returns even though there are good alternatives available at their finger-tips. Personal finance knowledge arms you with the skills to save and invest properly as per your financial goals. It gives you ideas about how much should you save, which investment options to consider and look at returns after adjusting for taxes and inflation.
• To Understand Taxes — Do you know that your bank deposit interest income is taxed? Do you know that the tax you will pay on FD interest income will be taxed as per your income tax slab? This means if you fall in the highest tax slab of 30%, your FD interest income will be added to your income and taxed at the same rate. Many people do not know the effect of taxes on their investments. As a result, when they have to face tax later, they realize their mistakes. By then, it is often too late. While we understand profit, we hardly realize that profit will be taxed as per applicable rules. You can also save tax by making various investments. For instance, Section 80C of The Income Tax Act allows every individual the opportunity to lower their taxable income by up to ₹ 1.5 lakh. By using this investment opportunity, you can lower your tax bill. Taxes are incurred for a wide range of transactions including selling home. Personal finance knowledge will empower you with the ability to understand taxes and benefit from various taxation rules. Saving your money from unnecessary taxes will help you grow your wealth faster.

Important Points to remember

• Personal finance is financial management done by individuals.
• It is easy to learn how to budget, spend, save and invest money over time.
• Dream big, but take small steps consistently to make dreams come true.
• Our financial lives are about meeting short medium and long term goals within the deadline.
• Proper personal finance knowledge helps you make informed choices.
• It is important to learn about risks so that you can earn returns.
• Saving and investing is as important as earning income.
• Focus and discipline can help everybody achieve personal finance success.
• Making mistakes and learning from them will result in wastage of time and money.
• Do not forget the effect of inflation and taxes on your financial plans.

Thanks for reading the Article

Originally published at https://www.yourcaguide.com on June 4, 2022.