Personal finance management is vital for long-term plans. It’s essential to plan for your future now so that you can enjoy your days after retirement. If you’re new to personal financing, there’s a lot for you to learn. But personal financing keeps evolving, and you never actually stop learning. But there are three critical aspects of personal finance: budgeting, saving, and investing.
If you learn the basics of personal finance, you can distinguish the good from the bad and make the most of your money. There are different strategies and techniques that you can adopt for effectively utilising your finances.
This beginners guide will go over all three points to learn the basics of personal finance; the rest you can learn with time.
Budgeting is the planning you do to manage your money. It would help if you started doing it at an early age, so you spend your money wisely.
When you’re budgeting, the first thing you need to do is identify your source of income. Is it from your job, a business, pocket-money, or borrowed? Once you’re set on that, you separate your needs from your wants. This is an essential step because many people skip this step, and that results in over-spending.
Your needs are the necessities without which it’s not possible to survive. These can include food, shelter, utilities (electricity, gas, water), clothing, etc. Now the second part is your wants; your wants can fall into the luxuries of life. These can include fine dining, vacations, branded items, etc.
As a rule of thumb, the best way to plan your spending is by following the 50:30:20 rule. This rule suggests you use 50 percent of your total income on your needs, 30 percent on your wants, and the remaining 20 per cent goes into your savings.
Savings are significant, and as we said before, you should save at least 20 percent of your total income. This will help you create funds in case of emergencies. But if for some reason, your funds aren’t enough, you can always opt for a loan same day. They are also an option in acute emergencies like accidents, excessive bills, health issues, etc.
If saving is difficult for you on your own, you can always go for a recurring bank deposit. In this you can instruct your bank to deduct a specific amount from your savings accounts and transfer it into your recurring account.
Everyone has short or long-term goals in life. To achieve them, you need money. While savings are a great way to increase your funds, investing your money is a better option to help it grow.
There are two options when it comes to investment that is the most beneficial. These include fixed returns and market-linked products.
If you want to avoid taking risks as much as possible, you should consider investing in fixed returns. Some examples of fixed return investments are bank fixed deposits, recurring deposits, and company deposits. The returns you get from such investments are independent of the market influence. On the contrary, if you opt for market-linked products, these include stocks and mutual funds.
Stocks and mutual funds are riskier as the market influences the returns you get. It’s essential to be cautious when investing in market-linked products, start small, and once you’re confident in your capabilities, you can invest large sums.
Now you know the three basic steps involved in personal finances, i.e., budgeting, saving, and investing. You must spend your money sensibly. Always make sure that your bills are paid on time; you don’t want to create more burden for yourself. If you’re under any debt, always repay it starting from the ones with the highest interest rates.
Moreover, it would be best if you tried saving money wherever possible. Cut off any services that aren’t necessary. For instance, if you have a gym subscription but you don’t use it, that’s just adding to your recurring costs needlessly. You can reduce your bills by unsubscribing for similar services that you don’t use.
Finally, if one budgeting method doesn’t work out for you, give it another shot. But don’t forget to be realistic in your budgeting plans. What might seem ideal on paper won’t turn out that way. It would be best if you created a budgeting plan based on your habits and lifestyle.