We must admit that financial literacy is the new skill that we all hear about these days and are keen on learning it. Well, we all should be equally eager to learn about financial literacy, and why not after all it’s all about our hard-earned money. So the first thing that comes to my mind when we talk about financial literacy is personal finance. So let’s discuss in detail what personal finance is all about.
What is personal finance?
Personal finance refers to managing your own money by spending, investing, and saving. It involves our personal financial goals like buying a piece of land, children’s education, planning for retirement, tax planning, going on a vacation, etc. Though the term personal finance is self-explanatory and easy to understand, I feel it’s equally challenging to follow personal finance do’s and don’ts.
Importance of personal finance
Personal finance is a subset of financial literacy and it plays a vital role in mastering financial literacy. One should be aware of his/her income, spending, investing, and savings for planning a better present and future. If we can manage our personal finances we can beat the inflation rates that are rising every year. Kids from an early age should be aware of personal finance. It should be included in schools where children can be taught what money is, how to earn money, how to spend it, and how to invest money. If not in school, its the responsibility of the parents to create awareness among our children about finance.
Factors of personal finance
Income is the amount of money you earn when you provide some service or create and sell a product. E.g. An employee can provide his services to an organization for 8 hours a day and get paid for those services. Using the income amount we can plan our spending, investing, and savings.
Spending includes all types of expenses like paying rent, EMIs, shopping, food, and travel. It should always be in limit and not exceeding the income, if that exceeds one may end up taking a loan which can have a very high rate of interest. Also one must avoid using credit cards if you have bad spending habits.
Saving is nothing but income minus spending or expenses. But spending can sometimes be never-ending. So it’s better to follow >> INCOME – SAVING = EXPENSES. Whatever income you earn first save and invest and then spend the remaining. When it comes to saving, some of us might keep the money in cash at home or in a savings account in a bank, due to which the purchasing power of money will decrease as inflation keeps on increasing. It is recommended to save at least 3 to 12 months of expenses in case of emergencies like layoffs, and pandemics.
Investing money means putting your money in other financial products like stocks, mutual funds, and real estate which can give better returns than keeping cash at home or in a bank. Investing helps to increase an individual’s wealth beyond what is invested. One important thing about investing is, it can be risky and will not always guarantee better returns.
Apart from all the above factors, insurance is one key factor in personal finance that is mostly ignored. Insurance basically means you pay a premium every month or year to a service provider and in case of a medical emergency, they will pay the bills as per the contract. Insurance can include health insurance, life insurance, vehicle insurance, etc.
Some of the best practices for personal finance
Add nominees for all banking, and finance-related accounts:
One must add a nominee to all banking and financial products so the amount or financial benefit is passed on to the nominee after the unfortunate demise of the policyholder.
Share your investment details with nominees:
Make your spouse or nominees aware of your bank accounts, investments, and insurance, and give them the password to manage the same. In case of any unfortunate accidents if the earning person is no more than the rest of the family should be able to survive.
Avoid taking any loan/debt as it will incur some rate of interest. See if you can borrow money from friends or relatives only if it’s really important. Avoid purchasing products on EMI, as these will also incur processing fees and rates of interest since it is a type of loan.
Use a credit card for all payments while being cautious:
If you have bad spending habits please avoid this option. But if you know how to make use of a credit card and how to use the grace period this option can be one of the ways to earn more money. When we use a credit card we get a period of 30 to 45 days to pay the amount we have used but first check the billing cycle. The best practice to use a credit card should be if we use a credit card for $200 make sure we make payment on or before the due date and that we have $200 in our bank account. These $200 in a bank account can also earn some interest, maybe 2% or 3%.
Also, it is recommended to set auto debit so that the monthly credit card bill is paid automatically. This can be helpful if you are on vacation or busy with work and forget to pay the bill. Remember the penalty is too high if the bill repayment is missed even by a day.
Avoid depreciating assets:
Avoid spending on depreciating assets, e.g. if you can manage without a car do not buy a car. You can opt for public transport or rent a car if needed. Invest more in stocks, bonds, mutual funds, or another asset that appreciates with time.
Know your Taxes:
One should be aware of the tax levied by the government on individuals. Learn more about the different types of tax, and how you can invest and save more on taxes.
Pay off any loan:
Try to pay off loans as soon as possible so that you can minimize the interest components.
Spend on experience
I prefer to spend on experience, vacations, and learning rather than on material things. These experiences will always be with you and it lets you know more things about the world around you. Only buy if you really need something. Do not buy things you do not need even if it’s at discounted prices.
Considering inflation, we should be cautious about where and how our money is spent and figure out no ways to increase our income. We should be focused on growing our money by investing and planning for the future. To do this we should be aware of personal finance.