Skip to main content

Basic principles of handling personal finance

You can also read this on BeingFinWise

__

How you handle your personal finances, can go a long way in determining you overall financial well-being. If you are good at handling it, you can be on path to financial independence even with a decent (not necessarily high) income. Conversely, if you don't handle your personal finances well, you may end up never being financially independence even though you may be making tons of money. 

Much has been already written about the basic principles of personal finances that can help you move ahead in direction of your financial goals, and frankly, it is not a rocket science. 

Here are my 2 cents on the principles of personal finance which can enable you reach closer to your financial goals. All seemingly obvious, yet often forgotten. 

1. Keep expenses less than earning 
Pretty obvious. Isn't it? Yet many of us fail to follow it. If your expenses exceed your income, then soon you'll lend up in a debt trap (personal loan, credit card debt and so on) and may soon need a major lifestyle re-haul to escape it. And this may come at a cost - not just financial cost. 

2. Invest the difference
Assuming, you keep your expenses less than income, what do you do with the balance money? Hopefully, it is not lying idle in your savings account (barring some buffer amount which you must have for any unforeseen emergency). The difference amount should ideally be invested in some asset class which can give you good returns for the future. You can choose a mix of some of the following -  equities, equity mutual funds, debt funds, PPF, real estate, gold and so on. Most of these investments come with their own merits and demerits, which you should evaluate before investing and take a informed decision. However, you should avoid putting all eggs in same basket and any long term investment must consist of a mix of different asset classes.

3. Avoid debt
Debt is potentially a big money guzzler. And peace of mind guzzler too. While taking debt, especially the ones with higher interest rate like personal loans or credit card defaults, you are making compounding work against you. With debt end up paying much more than the cost of the stuff you are buying, and in all probability you are without the buffer to invest and take benefits of compounding over a long run. 

Some forms of debt like housing loan may be OK (since you are buying an asset/ place of residence, and interest rates are not too high, plus they come with tax benefits), but for any other, you should rethink, and preferably avoid altogether. 

4. Beware of the instant gratification trap and impulse buying 
We all seek gratification in some form or other. Isn't it? However, for most of us, seeking instant gratification can lead to some terrible consequences in personal finance. Be it buying the clothes or accessories you don't need (but hey, there is a sale!) to downing few expensive tequila shots for few minutes of thrill (and hours of hangover!) to seeking gratification in gaming zones and concerts frequently - they don't come cheap. 

Of course, you should be enjoying things you like and enjoy, but constant pursuit of instant gratification comes at a cost. And you need to ask yourself the question - Are you ready to bear that cost?

One of the ways to reduce your expense of "gratification" can be the 24 hour rule (or a variation of it). If you want to buy something, don't buy it immediately. Wait for  24 hours, think over it and then take a decision whether to buy that thing or not. You'll be amazed at how many things you don't need.

5. Manage risk
Think about how will you deal with sudden health issue. Or how will your family cope if the sole breadwinner is no more. Get adequately insured - a good health insurance and term insurance can be good points to start with. Be cognizant of different types of risks - risk to life, risk to health, risk to investments & its growth, risk of job loss and so on.



There are several approaches one can take to invest & grow money - and many of these ways can be correct. However, you can't grow and invest money with a negative or near-zero cash flow. To begin with, one needs to  have a certain degree of control over personal finances. And ensuring that you follow some basic principles of personal finance can be a good starring point.

Comments

  1. Good work done and keep update more.i like your information's and that is very much useful for readers. Personal Loan in Lahore - Best Credit Card in Pakistan

    ReplyDelete

Post a Comment

Shop @ Amazon

Popular posts from this blog

Respect the sentiments

How often do we hear the above mentioned words? Especially in situations when there are chances of someone not taking anything well, or a comment not going down well with audience; in the situations when one needs to be politically correct and socially correct and be seen as morally upright. But if we remove the facade of the mushy gushy all-OK things, we can look into sort of ugly interiors of what respecting the sentiments mean ... and what it hides. Some of these reasons for expecting someone to respect the sentiments can be - 1. Person/ groups whose sentiments need to be respected are not open minded enough to hear a counter point of view, and my not be capable of any rational thoughts in that matter 2. There is something undesirable, or something ugly, or even something cancerous that needs to be hidden. 3. The truth might be extremely uncomfortable one, and ignorance might be a better option. 4. Deviation from the accepted norms is not desired. Reason - It has never been done so ...

Fully loaded with ... @ b-school

First half of the first term @ b-school and I am fully loaded with Balance sheet that don't balance Accounting equation which had debited my brain with frustation Supplies that aren''t demanded Accounts which I can't count Some useless statistics with highly any marginal utility Information technologies that hardly carry any information Acts of associaation that dissociates my brain The hairs that are depreciated from my head by means of scratching Probablities, to understand which is improbable A grouped data set of competants in which I am an outright outlier in the negative direction Motivation theories that leave me demotivated Leadership theories, which I try to follow Theories of satisfaction that leaves me dissatisfied Assignments that I wish had never beeen assigned to me Researches, which I don't want to search even once Communication, whose message I couldn't grasp All paths leading to the so called "dream jobs", which we don't have any ...

On koolness, Phonyness, Holden Caulfields etc. and all

This is one more post with nothing in particular. It was just that I was feeling like writing something crappy as no one was listening to me. I was watching a movie, not studying, was in a mood to do nothing in particular, getting bored and all that stuff. Actually I was browsing through people’s Orkut profiles. They have written such a nice bunch of krap. I mean all sounded so unreal, so phony. I mean, every second guy is a cool guy. That I must have seen million times by now. This all scares hell out of me. I mean I don’t say that I am someone great or someone like Howard Roark or John Galt, nor I can be. I don’t have such great ideals or morality or any such krappy stuff. But it all sounds so unreal and millions tonnes of aaattitude and exhaggerations thrown in. Dude … they are so arrogant. I mean, they are such idiots that they think that only they are the only human beings on earth, and others are just crappy combination of cranky bones and muscles. And all those artificial and c...

Financial tips for a 25 year old

Originally published at  BeingfinWise __ If you are 25 year old, there is a good likelihood that you would have started working or are likely to start soon. And hopefully start(ed) managing your own finances. So, what do you do next? The good news is that having a profession can soon lead to cash flows which perhaps wouldn't have seen in your student days. And that can be empowering in many ways. The bad news is that, if you are reckless with spending money, it can soon lead to a downward financial spiral. Managing your finances well can be a good first step towards a healthy financial life. And it starts with small steps.

Rich, yet bankrupt

Originally published on BeingFinWise __ Tennis legend Boris Becker is in news - for wrong reasons. He is having auction off his trophies to pay off his debts . Even then, the debt will not be fully repaid. To think of it, he was the youngest Grand Slam champion & considered one of the greats in tennis. He won Wimbledon when he was just 17! At that level, tennis does pay a huge amount of money! So we can safely assume, that he would have had no dearth of money. Boris Becker is not the only celebrity to be rich, yet bankrupt. There are ample examples. For example, Michael Jackson died, he was in huge amount of debt.