Complete Guide to Personal Finance for Beginners

To be financially secure, you need to take care of your finances and find strategies to reach your goals. You must first decide about your current position and where you want to go. Personal finance is all about how you manage your money, and how you navigate everything from budgeting to savings, keeping control of your debt situation, planning for retirement, and investing your hard-earned money. You must determine your income, spending, and living needs and devise a plan to meet those needs within your budget. To maximize your earnings and savings, you need to become financially literate to distinguish between good and bad advice.

Personal finance is a broad topic, with many different areas and aspects. Thus, the following are the key topics in personal finance that beginners should be aware of:

Areas of Personal Finance for Beginners

1. Income

It refers to the cash flow or any type of earnings in the form of salary, rent, wages, pension, bonus, etc. It is the main foundation of personal finance. This income is used to spend, save, or invest. Knowing your income is crucial when allocating funds to categories that may have an impact on your financial situation. You now need to understand the difference between two types of income, i.e., gross and net income.

Generally, net income refers to the amount received after taxes and other deductions, whereas gross income is defined as the amount received before taxes and other deductions.

2. Expenses

This includes any costs incurred when purchasing any goods and services. Now, most of our income generally goes to spending. Due to this, we are not able to save or invest much. These spending habits have the power to make or break a budget. This is especially true for phantom purchases or unanticipated events like an emergency. Keeping a tight rein on your spending can determine your success in meeting your financial objectives.

3. Investments

We frequently mix up investing and saving or consider them to be interchangeable. Savings is setting money aside; investing, on the other hand, is investing or buying assets to increase your money, like stocks, bonds, mutual funds, and so forth. You must select an investment based on your risk and investment goals. Mutual funds and stock investments are the most popular options available in India.

In case of any confusion or help, you can always plan to seek help from any professional or financial planner.

4. Savings

Savings are funds set aside for future investment or expenditure. If you make more money than you spend, the difference can be saved or invested. Savings are done to meet your emergency needs. You should not put your entire money into savings because they yield little to no return when compared to investments. As a general rule, your emergency fund should be three to six months’ worth of expenses. Debt instruments such as Liquid Funds are excellent options for storing money set aside for emergencies.

5. Protection

In terms of finances, this usually entails purchasing insurance. Usually, insurance is something that is ignored or not taken seriously. Even today, most people lack basic insurance coverage. Insurance is a critical tool for ensuring the survival of a family in the event of an emergency. It helps you in providing financial assistance while managing your risk. In case of any financial hardships, insurance can be a savior. Two insurance that are a must for everyone are term insurance and health insurance/critical illness insurance.

A Step-by-Step Guide to Personal Financial Planning-

Everybody has different financial objectives, which means that everybody needs to plan their finances differently. To effectively plan your personal finances, follow these steps:

1. Set financial goals

Before you begin, you must identify your objectives, which will serve as the foundation for your goals and targets. Organize your goals and objectives by priority and importance. Defining your financial goals allows you to better plan your finances.

This exercise will assist you in determining your risk tolerance and the appropriate funds for it. Gather all relevant financial data relating to your income and expenses to assess your current financial situation. Examine whether your objectives are attainable.

2. Create a budget

A budget is required to live within your means and save enough money to achieve your long-term goals. The 50/30/20 budgeting strategy is a great place to start. The breakdown is as follows:

50% or roughly half of your income should go into necessary expenses like rent, groceries, utilities, etc.

Discretionary spending, such as dining out or shopping, is allocated 30% of the budget.

Finally, the left i.e., 20% should be your savings and investment.

You can use an Excel or Google Docs spreadsheet to help you create a budget and track your progress. Budgeting apps can also help you track spending in real time by syncing them with your bank accounts.

3. Build an emergency fund

Aside from planning for the future and your goals, creating an emergency fund is an important part of creating a financial plan. You cannot rule out the possibility of getting into financial trouble, regardless of your financial preparation. As a result, you can always set aside a portion of your earnings for emergencies. At least three to six months of your monthly expenses should be contributed toward your emergency fund. It is suggested to put your funds for an emergency in short-term debt funds like liquid funds or savings accounts.

4. Limit debt

In order to maintain a good financial plan, it is imperative to pay down high-interest debts as quickly as possible, such as payday loans and credit card balances. Because of the high-interest rates on these debts, you may end up paying twice as much as you borrowed. Choosing a high-interest debt is thus an excellent executor of your financial strategy. If you are debt-trapped, try a method of debt consolidation. Consumers use debt consolidation to pay off small debts all at once by taking out a large loan. The borrower would now have to make a single payment to the lender rather than multiple payments to other creditors.

5. Start planning for your retirement

Retirement may appear to be a long time away, but it arrives much sooner than you think. Experts estimate that most people will need roughly 80% of their current income in retirement. In the long run, you have the greatest chance of benefiting from the “magic of compounding interest,” which describes how tiny amounts accumulate over time. Invest in various instruments like stocks, mutual funds, bonds, etc. when you are young and once your retirement is near, invest in safe instruments like government securities or debt instruments.

6. Tax planning

There are so many tax exemptions and deductions, that we are not aware of. Consult a Chartered accountant or financial advisor to create a tax-efficient plan as per your requirements and income. By maximizing your tax savings, you will have more money to put toward debt repayment, investments, and future goals. Every year, you should start saving receipts and tracking your expenses to ensure that you take advantage of all available tax deductions and credits.

7. Review your plan regularly

Learning how to create a financial plan is not a one-time event. Your goals (and financial situation) aren’t static, so neither should your plan. To continue setting yourself up for success, you must reevaluate your plan on a regular basis and adjust your goals. As you advance in your career, you may want to be more aggressive with your retirement plan or insurance.

As an example, a young person in their 20s in their first few years of work may be less able to save for retirement and have fewer savings accounts than a person in their mid-30s. So, it is important to review your plan regularly to ensure your goals are on track.

Final Thoughts

Personal finance is complex, and if you feel overwhelmed, you can seek expert advice from experienced professionals. However, if you keep track and monitor all your resources and also have experience with the markets and your funds, then your financial planning skills will improve as you gain experience. If you require professional assistance, you can always contact a variety of financial advisors both online and offline.

FAQs

Q1. What is personal finance?

Ans- Personal finance refers to the management of an individual’s financial resources, including budgeting, saving, investing, and planning for future financial goals.

Q2. Why is personal finance important for beginners?

Ans- Understanding personal finance is crucial for making informed financial decisions, achieving financial goals, and building a secure financial future.

Q3. How do I create a budget as a beginner?

Ans- Start by tracking your income and expenses. Categorize your spending, identify areas where you can save, and allocate funds for savings and investments.

Q4. How do I start saving money?

Ans- Begin by setting specific savings goals. Automate your savings by setting up automatic transfers to a savings account. Gradually increase your savings as your income grows.

Q5. How can I start investing as a beginner?

Ans- Start by educating yourself about different investment options. Consider low-cost, diversified investments like index funds. Set clear investment goals and determine your risk tolerance before investing.

Q6. How can I plan for retirement as a beginner?

Ans- Begin by contributing to employer-sponsored retirement accounts like the EPF or PPF. Consider additional retirement accounts like a Pensions and Annuity Fund (NPS) or other long-term investment options based on your risk tolerance and goals.

Q7. Is seeking professional financial advice necessary for beginners?

Ans- While not mandatory, seeking advice from a financial advisor can provide valuable insights, especially for complex financial situations. Online resources, books, and financial literacy programs are also useful for self-education.

by Instockbroker Team | June 21, 2024