Useful tips to manage personal finance
Managing personal finance does not involve only earning and saving. Various other factors like saving income tax, optimising insurances, setting up goals and preparing a will are also essential parts of managing personal finance. This article provides a valuable insight on these aspects of personal finance.
Managing personal finance does not only involve checking unnecessary expenditure and increase of savings. This involves managing six priority areas. More importantly, it is a continuous process and must be re-looked after every six months. Another myth in this regard is management of personal finance is necessary only for High Networth Individuals (HNIs). But this is furthest from truth. Managing financial resources is extremely necessary for every individual. The beginning of managing finance resources is very tedious and cumbersome, but it is very rewarding in the long run. A person, who is managing his financial resources judiciously, will start getting the benefit in around two years time and will continue getting the benefits throughout his life. In this article, we will discuss the ways of effective management of personal finance.Budgeting – income and expenditure
At the outset, a person must list the various avenues of his income. Various avenues may include earning by salary, rental income, interest income and occasional income like bonus and special increments, etc. Similarly, the person must carefully jot down his expenditures. Some expenditures are regular, i.e., he has to pay these obligations every month like, expenditure for grocery, various monthly bills, school fees of children, etc. Some expenditures are occasional and some are unforeseen. After taking into consideration all these factors, he should calculate the monthly savings. Again, these savings must be divided in two parts, one necessary for meeting short-term needs and another for long-term needs like education and marriages of children. Income tax- avail all the provisions
Most of the people in India become conscious about payment of income tax at last moment, i.e., in the month of February. As a result, they start investing haphazardly to avail income tax benefits. Consequently, they purchase unnecessary and unsuitable investment instruments. Income tax planning should start immediately at the beginning of every financial year, i.e, in April and it should continue throughout the year. Moreover, many people exhaust the maximum amount of income tax exemption under Section 80C of the Income Tax Act and don't bother about other useful Sections of the Act. Every person must remember that the Government provides other income tax saving avenues e.g., health insurance (Section 80D), National Pension Scheme (Section 80CCD), saving of income tax by producing rent receipt, saving of income tax for home loan, etc. All of us must avail all the benefits provided by the Government to save income tax. Insurances – optimum level
In India, many people use insurance as means of investment. It is a totally wrong approach. Basically insurance is a protective umbrella for the family members in case any untoward incidence happens to the earning member(s) of the family. Basically there are three types of Insurances, viz., (i) term insurance for life, (ii) health insurance for treatment of diseases and (iii) accident insurance. A person must take care to the fact that the insurance cover should not be excessive, nor it should be inadequate. The insured amount should be such that it would meet the requirements of the family in case of death/accident/treatment of the insured person. Insurance must not be treated as an investment avenue, nor should it be treated solely as an income tax saving instrument.Retirement – building retirement corpus
Till such time a person is earning money from the job or business, the risk factor is considerably less. But after retirement, the inflow of cash, i.e., earning will gradually stop. In such a situation the retired person has to be completely dependent on his/her accumulated saving. If the accumulated retirement saving is not adequate enough for sustaining the residual period of life, it may cause a big problem for the entire family (spouse and other dependants, if any). In the process of managing personal finance, retirement-linked investments are extremely important. Calculation of requirement of fund for comfortable sustenance must also be done with lots of care and foresight. In this way a person can decide how much fund should be accumulated before retirement. In addition to this, every salaried person must also include the retirement benefits from his/her own office at the time of retirement.Goal setting – short-term goals and long-term goals
As already mentioned, the estimated saving of a person must be divided in two parts. The first one should be to meet short-term goals like purchasing vehicles, two wheelers, consumer items like television, refrigerator, etc. For meeting the short-term expenses (up to three years duration), it is advisable that the saving earmarked for this purpose must be kept in a liquid fund or in a debt-oriented hybrid mutual fund. The main purpose for this advice is to protect the invested amount from high level of volatility with marginally better return. For the long-term investment like children's education or marriages, the earmarked amount may be kept in equity mutual fund for at least five years. This will ensure better return than return from fixed market instruments like PPF/GPF. When the event comes closer, the accumulated amount should be gradually shifted to a liquid fund.Creation of a legal will – for the sake of family members
Accumulating wealth is definitely necessary for a person, but pre-arranging its distribution after one's own death is also extremely important. When a person dies intestate (i.e., without making a will), the confusion, discomfort and consequent litigation which it can cause to the potential heirs must be avoided by all means. This is the reason why mature people always have/keep a carefully-drafted and executed will once they reach fifty. Listing all assets and properties and nominating right heir(s) for the assets and properties are the main purposes of a will.
The investors must remember that managing personal finance is important for everybody. It is a systematic and continuous process. Following the afore-stated tips will definitely help every person to manage his/her savings and investments with optimum return and give mental peace during the twilight years of his/her life after completing all responsibilities to the dependants.
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Most people in India do not pay Income tax and those who pay, in a bid to avoid huge tax start spending money on unnecessary loans and other things.
And I think we must be taught the benifits of financial planning in our schools, so that kids learn and manage their finance in a well structured way.