Personal Finance

2024-08-02

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Personal finance is more personal than it is finance. The core principle of personal finance is giving the right treatment to one’s own money that it deserves. If it’s your money on the line, then you’re the most qualified person to decide where to invest the money. Because you’re the one who knows the best about your targets and requirements.

Most of us work hard to build a fortune at the end of our work life. But if your personal finance game is weak, you’ll have quite a few issues managing your wealth effectively.

Personal Finance – Definition

Personal finance is all about planning to achieve the major financial goals in life. From budgeting to investing, from stock investment to retirement planning, everything remotely connected with money can be considered personal finance. However, the two main pillars of it are to save money and invest it in the right financial instrument for optimal return.

In simple words, anything related to money that requires planning and execution can be called personal finance. There was a time when people took the help of financial advisers to manage their wealth.

Components of Personal Finance

Personal finance has mainly four different components.

1. Income

Without money, there’s no personal finance. So your ‘personal finance’ journey starts as soon as you have a steady source of income. However, salary is not the only type of income. Things like business profits, dividend income, and income from freelancing are also a part of it. All the sources of cash inflow are termed as income.

Learn more about income from other sources.

2. Expenses

Expenses or cash outflow is another vital aspect of personal finance. An accurate personal finance planning would never advise you to stop spending and put as much as you can into savings. Instead, you should spend enough money that can’t offset your financial goals.

3. Investments

Investment is a crucial part of personal finance. Purchase of land, stocks, bonds, and even opening a fixed deposit account can be termed as an investment. Investing in the right instrument in-line with your risk appetite can be a tricky task. You need to put a lot of effort into research and analysis before proceeding with any investment.

4. Financial Safety

Last but not least are financial safety and protection. Your money is of no use if it can’t make a soft landing during a financial crisis. Unexpected events like accidents or natural calamities can happen anytime to anyone. Having insurance is the best way to ensure financial safety in dire situations.

Strategies for Managing your Personal Finance

Strategizing for effective personal finance goals is a must to ensure your financial matters are sorted. The sooner you start making a plan, the better it is. Here are the key steps you should take while devising your personal financial plan:

1. Prepare a Budget

Be it a nation or a person, making a robust budget is a must-do exercise once a year. A well-laid-out budget guides you to live within your means and motivates you to save extra for long-term financial goals.

An ideal budget should look like the following:

40% of net income for essentials like rent, grocery, utility bills, transportation, paying off debt, and insurance premium payment
30% should be allocated towards discretionary expenditure like buying clothes, gadgets, dining out, and travelling to tourist destinations
The rest 30% of net income must be saved for the future through different asset classes

Recommended Reading - Income from Salary

2. Save First before Big Expenditure

If you’re early in your career, your primary goal should be to save up a decent amount as an emergency fund. An ideal emergency fund consists of 3 to 6 months of living expenses. You can stretch it up to 12 months for extra cushioning.

Always keep your emergency fund in highly liquid assets. Accessibility should be your priority for storing the money, not return. For this purpose, bank FD, liquid and ultra-short-term mutual funds are best suited.

3. Keep Expenses in Check

One of the key objectives of setting up personal finance strategies is the reduction of expenses. People, especially the young ones, tend to be reckless with money. At its extreme, you could be spending more than your take-home pay, which is disastrous for your financial health.

So, your goal while setting up the strategy should be to keep a tab on unnecessary expenses. List out all the requisite expenses for the coming year and allot a portion of your income towards it.

4. Have Adequate Insurance

Having adequate insurance coverage during adverse situations is a lifesaver. People often have a misconception that life insurance is a waste of money. But those who have gone through a difficult stage of life know the real value of insurance coverage.

a. Life cover equal to at least 10 times your annual income
b. Health cover equal to your annual income

Life insurance and health insurance are the two types that people of all ages should get. The earlier you purchase an insurance policy, the cheaper it is in terms of the premium amount.

Minimizing Tax Using Personal Finance

Although you can’t avoid taxes, you certainly can lower them with proper financial planning. There are many financial tools available in India that can help you minimize your income tax burden. Here are all the popular tax savers in a tabular format.

Instrument Name	Tax Saving under Section	Lock-in & Return	Max Tax Exemption
PPF	80C	15 years & 7.1%	Rs 1.5 lakhs
NPS	80C & 80CCD	Up to 60 years of age & 8-12%	Rs 1.5 lakhs + Rs 50,000
Life Insurance	80C	Variable	Rs 1.5 lakhs
ELSS	80C	Min 3 years & 10-15%	Rs 1.5 lakhs
PF	80C	Up to 60 years of age & 8.1%	Rs 1.5 lakhs
SCSS	80C	5 years & 7.4%	Rs 1.5 lakhs
ULIP	80C	Variable	Rs 1.5 lakhs
NSC	80C	5 years & 6.8%	Rs 1.5 lakhs
Home Loan Interest	24 & 80EE	Not applicable	Rs 2 lakhs
Home Loan Principal rep.	80C	NA	Rs 1.5 lakhs (Rs 2 lakhs for above 60 taxpayers)

There are quite a few provisions for reducing tax liability in the Income Tax Act, of 1961. The most popular of them all is Section 80C. It is always advised to invest Rs 1.5 lakh a year in popular saving schemes that carry tax benefits u/S 80C. You can choose more than one scheme and divide the whole amount into parts. Also, the New Pension Scheme (NPS) allows you to save taxes up to Rs 16,500 over and above Section 80C.

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Personal finance is not rocket science. However, it has more than one aspect you will need to take care of. Thus, it pays to keep it simple. We can complicate it if we try implementing many things at the same time.

In reality, all we need to do is establish simple strategies and diligently follow the path laid out by those strategies. Automating your long-term investments allows you to focus on important and big financial decisions. With consistency, perseverance, and proper personal finance strategies, you can get to their desired financial targets.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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