BASICS OF PERSONAL FINANCE MANAGEMENT
Personal Finance management involves managing expenses within the Income earned and generating a surplus to care for future needs. The ultimate aim is to have a good night's sleep tonight without financial worries for tomorrow clogging our minds and to have a pleasant dream of tomorrow.
Expenses may be mandatory, essential, or simply for luxury. Tax to be paid on Income is compulsory. Food, housing, clothing, transport, or insurance may be crucial. Buying a car or taking an overseas vacation may be considered a Luxury. No clear-cut division can be drawn as the expenses depend on an individual's personal needs, and any two persons' needs are different the same. You are the best judge in deciding what is essential and what is luxury.
Some facts about Expenses
1. Generally, expenses go up as the Income level rises.
If you are earning Rs 50,000/- pm today, remember when you were earning Rs 5,000 pm. It may be 10 to 15 years earlier. As is the case for today, you would be spending most of your earnings. Your expenses have constantly drained your Income. One may blame inflation as the cause of such an increase in spending. But inflation is not the only cause. Your lifestyle has changed. You no longer take the bus for your daily transportation to work. You no longer eat in the same restaurant once you were having your lunch/dinner. Your child now goes to a "GOOD " school. New modes of transportation, new posh restaurants, and new prestigious schools are taking away whatever extra you have earned. Thus, expenses continue to fill your income buckets.
2. The level of expenses on essentials varies from person to person.
An ordinary man may spend money on bus fare for daily transport, while a blue-collar worker may need a motorcycle or car for the same purpose. Eating at a restaurant may be a need for one family, while others may feel it is a luxury. Hence, what we spend on "essentials' is also out of our choice and hence can be controlled
3. More and more items move from luxury to essential as Income rises.
For example, buying a car or a TV or going on an overseas vacation, which would have been treated as a luxury earlier, may become essential as one's Income improves.
In a shell, Expenses, whether for essential or luxury goods, are primarily out of our choice and hence can be managed.
Personal Finance management involves managing expenses within the Income earned and generating a surplus to care for future needs. The ultimate aim is to have a good night's sleep tonight without financial worries for tomorrow clogging our minds and to have a pleasant dream of tomorrow.
Expenses may be mandatory, essential, or simply for luxury. Tax to be paid on Income is compulsory. Food, housing, clothing, transport, or insurance may be crucial. Buying a car or taking an overseas vacation may be considered a Luxury. No clear-cut division can be drawn as the expenses depend on an individual's personal needs, and any two persons' needs are different the same. You are the best judge in deciding what is essential and what is luxury.
Some facts about Expenses
1. Generally, expenses go up as the Income level rises.
If you are earning Rs 50,000/- pm today, remember when you were earning Rs 5,000 pm. It may be 10 to 15 years earlier. As is the case for today, you would be spending most of your earnings. Your expenses have constantly drained your Income. One may blame inflation as the cause of such an increase in spending. But inflation is not the only cause. Your lifestyle has changed. You no longer take the bus for your daily transportation to work. You no longer eat in the same restaurant once you were having your lunch/dinner. Your child now goes to a "GOOD " school. New modes of transportation, new posh restaurants, and new prestigious schools are taking away whatever extra you have earned. Thus, expenses continue to fill your income buckets.
2. The level of expenses on essentials varies from person to person.
An ordinary man may spend money on bus fare for daily transport, while a blue-collar worker may need a motorcycle or car for the same purpose. Eating at a restaurant may be a need for one family, while others may feel it is a luxury. Hence, what we spend on "essentials' is also out of our choice and hence can be controlled
3. More and more items move from luxury to essential as Income rises.
For example, buying a car or a TV or going on an overseas vacation, which would have been treated as a luxury earlier, may become essential as one's Income improves.
In a shell, Expenses, whether for essential or luxury goods, are primarily out of our choice and hence can be managed.
PLAN YOUR EXPENSES
ART OF MANAGING EXPENSES
Management of personal finance is the art of managing expenses. While we talk of controlling expenses, we do not mean cutting expenses on what you love most or changing your lifestyle. Your goal of earning more itself would have been to change your lifestyle for the better. However, if your income level has dwindled for any reason and you have been trapped in debt, we only suggest changing your lifestyle to adapt to the new circumstances.
The whole exercise of personal finance management is to give the stamina to continue the life lifestyle, such as the eventuality of reduced income. If you manage your finances well today, your savings, investments, and insurance will care for your future. Hence, by managing individual components of expenses like tax, insurance, utilities, and Luxury, we can achieve the goal of controlling expenses for today and garnering a surplus for future use. While making a plan for the future, what we call financial planning to achieve our long-term goals, the present surplus we generate will help us guide our future. We discuss separately on our FINANCIAL PLANNING PAGE about making future goals and achieving them.
PLAN YOUR TAX OBLIGATIONS
Tax is a necessary social and legal obligation, and one must provide for it unless it is deducted at the source. However, various provisions under the law allow one to obtain an exemption. The middle class mainly uses the 80 series. Tax consultants/ chartered accountants help get all eligible exemptions to reduce the tax burden. The government's income tax department has a handy portal churning valuable taxpayer guidance. One can go through and understand the basics.
BE INSURED
Events like loss of job, accident, hospitalization, disease, theft, etc, or loss of life of earning member may be unforeseen but not uncommon. We may not know when such things will happen, but we should be prepared for any eventuality. While loss of job, loss in business, or loss of life may erode our income, accident or disease may bring us unexpected huge expenses. Insuring ourselves and our family against such risks should become part of our regular expenses and be treated as essential. While insurance is available for many risks we may encounter, we must provide for the risk of job or business separately.
While taking insurance, care should be taken to ensure that all possible risks are covered adequately through various policies against the maximum loss envisaged. Life insurance usually has a savings component; many use it as an investment option. As they carry a substantial maintenance charge, they are not suitable purely for investment purposes. Various insurance companies are offering their services. Before taking any insurance, one should compare terms and conditions, premia charged, the policy's suitability, and the insurance company's standing. There are portals offering comparison services that can be used.
Ten Tips for expenses control of utilities/Luxury items
1. Spend without guilt on what you consider essential for you. Cut down on what you think is optional by you.
2. Buy what is affordable to you. It would help if you did not lose a night's sleep to pay its bill.
3. Buy because you need it, not because your neighbor/colleague owns it.
4. Remember, Best is the only, sometimes highest priced.
5. Change any item like cars, electronics, or computers you own if the same is not working. Keep the same because a newer model or version has come. New versions would appear every quarter, and we cannot always own the latest as long as what we own suffices; our requirements stay the same.
6. Plan your spending well in advance. Before comparing the prices of various vendors, it lets you compare prices, charges, and services with online shopping and decide where to buy. Sometimes local shops may sell cheaper than any big name.
7. You may get the same goods you want to buy at a discount on festive occasions or when the season ends. Wait if you can and reduce your expenses on the item. Planning will help.
8. Do not cut expenses on insurance or maintenance of goods you own. Such costs are essential and would save you in the long term.
9 . Be within your budget. Plan to spend only a portion of what is affordable for you.
10. As your income increases, your lifestyle changes. Try to be conservative so that all your additional expenses do not outweigh your additional Income. Save more and more of your additional Income.
TOOLS OF FINANCIAL MANAGEMENT
Cash:
Cash is the first financial asset anyone holds. Though its importance has come down over time with the advent of bank accounts, Credit and Debit Cards, Mobile money, etc, cash is still the primary tool for financial transactions in India. As one has to handle it daily, one must be aware of the features of currency and ways to keep it safe. Reserve Bank of India, which issues currency notes in India, has provided valuable information about the security features of its various notes. Click here to visit.
Bank accounts:
Bank accounts are the fundamental tools for managing personal finance. They help you to receive your income and make payments. A statement of account/passbook will help you have a tab on your income and expenditure. Studying your account statement lets you know how you spend your income and how much you can save.
Credit Cards:
Credit cards are helpful as payment instruments and have a few days of credit. They also act as your emergency stop-gap arrangement before you make actual arrangements for needed finance. Credit card statements are, again, tools to understand your spending pattern.
Housing Loans:
Owning a house as opposed to renting has its advantages. It shields you against inflation. Housing loans help you buy your own shelter and reduce your Tax burden. As such, it should be an essential tool in managing your finances.
ONE IMPORTANT MANTRA FOR FINANCIAL PRUDENCE IS COMPARE:
Whatever service you avail of, whatever goods you purchase, spend some time understanding the products and comparing the cost and reward of the item. Once you have chosen the product, again compare Prices & Charges. In today's internet era, utilize your computer and internet connection to your advantage and surf various sites offering such products and services. You can save a lot, and the Time spent will be well spent.