Personal Finance 101: The Complete Guide For Beginners

It is a wide range of financial activities that affect our daily lives, and include activities like managing debt repayment, income, banking, insurance, tax planning, retirement planning, portfolio management etc.Managing this personal finance is called financial planning; it includes everything that happens after one earns money. With financial planning, a person manages financial position and money in a way that his or her financial goals are achieved.Thus, good personal finance management helps you to achieve your long and short-term financial goals while preparing you for financial emergencies. It involves the effective use of financial services and products that help you manage your debts and other banking activities, save, and invest.At a daily level, personal financial management is also about adhering to and monitoring your household budget.While personal finance involves the management of the money earned, your efforts towards increasing your income and exploring alternate revenue options are also a part of the planning.

There are five basics of personal finance. For it to be successful, you must have a stringent overview of these basic areas:

1. Income Personal finance is all about managing the inflow and outflow of money. You may be a salaried person or a pensioner. You may have business income or be earning rental income or have received dividends from stocks, or profit from the sale of assets. While managing personal finance all sources of income are identified and future flow is estimated. This is important for creating and maintaining a household budget. This is easier for a salaried person. Self-employed individuals must forecast their earnings and add fixed incomes like rent and pension, as applicable.
2. Expenses Try to keep an eye on how much you are spending so that your personal finances are in order. This includes the monitoring of typical household expenses like rent, loan EMIs, food, travel and conveyance, entertainment expenses, education and tuition, utility, credit card bills, etc. Regular monitoring of expenses and compliance with the household budget will enable you to control your finances.
3. Saving By minimising expenses and following a budget, you can save a portion of your income for investments or future expenses. The hallmark of astute financial planning is to earn, save, and spend, rather than earn, spend, and save. You should have an ambitious saving target, achieve it every month and then spend the remaining income on your household needs and wants. Savings can be maintained in cash, savings bank accounts, short-term securities, and funds, etc.
4. Investing Your investments help you achieve your big-ticket financial goals, like retirement, a home purchase, children’s higher studies, marriage, etc. Investment is the purchase of physical or financial assets that are expected to generate a return on its value. But there are various levels of risk associated with investments. Therefore, this is one area of personal finance where professional advice is often sought. In India, personal finance consulting is a popular support available for this purpose.
5. Protection The above four are often quoted when someone asks what the four basic principles of personal finance are. However, a fifth element cannot be ignored; this is protection from unforeseen events – an essential part of personal finance. This includes life insurance, health insurance, and general insurance of your assets and properties etc. These financial products help the family recover from adverse events by providing financial compensation.

If you are trying to find out what is the first step to start with a personal financialmanagement journey, follow a few simple steps. By doing so you can meet your short-term and long-term financial goals, and also prepare for financial emergencies better.

• Financial goals You can chase your financial goals successfully when you have them clearly defined. This should include all your goals – short-term goals like a new gadget, medium-term like a house, and long-term goals like your retirement corpus.
• Investment strategy To achieve your financial goals you must design an investment strategy. The risk associated and the volume of investments will depend on how ambitious your financial goals are. You will need to save accordingly. Thanks to IT efficiency in India, personal finance software is readily available to simplify saving and investing for absolute beginners.
• Budget How to manage personal finances and save more from my income, you might ask. The answer is to assess your regular income and expenses and create a monthly budget. The budget must accommodate enough savings so that you can invest as per your strategy. While creating a budget, you must take your essential expenses, avoidable expenses, savings, and investments into account. It’s very important to cut down on unnecessary expenses to maximise your savings and improve your financial strength.
• Debt management Debts can become a hindrance to your savings and investment goals. The longer you continue to repay, the higher would be your debt interest cost. Look for opportunities to clear your existing debts and avoid a new loan until you are debt-free.
• Emergency fund The problem with an emergency situation is that it can wipe off a large chunk of your savings in a flash. Set aside a small sum from your regular income to build an emergency fund. This fund can become important if you face a medical emergency, a job loss, a poor spell in business, etc.
• Insurance Insurance products exist to protect you and your family’s finances. Your life insurance protects your family from financial setbacks caused by your death, while health insurance protects your wallet during medical emergencies. Insuring your properties and assets similarly acts as a financial cushion. Identify your insurance needs and keep your life, health and assets protected adequately.
• Monitoring your investments Disciplined investment alone will not be enough to reach your financial goals. You must monitor the performance of the investments and ensure that they are generating the expected rate of return. If not, you must reshuffle your portfolio. Besides, diversifying your portfolio is also important to spread out the investment risks. You should create a diversified investment portfolio by investing in a variety of instruments such as mutual funds, fixed deposits, pension schemes, provident funds, etc.

If you are wondering, how do I start my own personal finance management?read our article on the 10-step money plan by clicking here .

Handling personal finance for beginners as well as seasoned professionals calls for detailed planning and discipline.

Young professionals

For young professionals, the primary personal finance challenge is to pay attention to savings. Young professionals may end up spending more, at the cost of savings. They can avoid doing so by sticking to a budget. By following a budget, they can keep a tab on their expenses and avoid unnecessary ones. As observed during the pandemic, adequate health insurance and sufficient emergency funds are very important for people who are still new to their professions. Young professionals must, therefore, have sufficient health coverage and rainy-day funds.You can read about the important financial tips for millennials in this article .

Low-income individuals

Someone with a low income often struggles to cover the monthly expenses with the income they have. For some, household expenses may simply be too high. For them, budgeting is the ideal personal finance tool. They must also be ruthless in their expenses and cut down heavily. They must also bring their family on board in this effort so that cost-cutting becomes a collective effort and more fruitful.By following this approach, they will try to save and buy the things they want, rather than resorting to credit products. If you are one of them, you must look beyond what is the 50-30-20 budget rule.Rather than spending 50% of your income on needs and 30% on wants, you should seek to lower the wants and increase the savings beyond the 20% suggested by this thumb rule.To understand what the 50-20-30 rule and the keys to successful personal finance management are, read this article .

Risk-agnostic individuals

The importance of risk in financial decisions cannot be stressed enough. Many people invest their savings without considering the risk associated with investments. These are people who often don’t have a clear sight of their financial goals. Such individuals must finalise their financial goals and decide on their risk appetite. Your risk appetite indicates how open you are to taking risks in your investments to achieve financial goals. A very aggressive investor would invest in equities and derivatives. But if you are risk-averse, you will opt for the assured income from government-backed instruments.The success of personal finance and financial planning is crucial for every individual. And financial planning must be considered by everyone and under any situation.

Career uncertainties

For someone who is undergoing a job switch or a loss, smart handling of personal finance is hugely significant. It will help them to overcome the financial difficulties that people face during uncertainties in their careers. Someone in such circumstances must have a complete picture of their financial position. They should ration their expenses and be smart in managing them. They should avoid using any new credit facilities, including credit cards. Alternate sources of income must be explored so that income flow is not completely stalled.They must have an emergency fund in place so that they can survive a few months without income. They must keep their credit score respectable so that they can avail of a new credit line if required.

Women investors

Women who are avid investors must adopt specific personal finance strategies to achieve success in their investment journey. They must identify their financial goals and link their investments. For example, they can consider blue chip stocks and debt instruments like PPF for long-term financial goals. To invest towards their short and medium-term goals they must invest in mutual funds and financial instruments of moderate durations.Women looking to build a fortune through smart financial planning must read this article .

An understanding of personal finance and financial planning helps every person, who may be from any section of society.If you have children, teach them about the flow of money. They should understand that money has to be earned and saved before they can splurge on things they want to buy. Many parents ensure this by following the practice of pocket money and allowances.Earn, save, spend - If you compensate your child for helping you wash your car or help you out with cleaning the house, they will understand the value of hard-earned money. Rather than simply gifting children the expensive toy or bike they want, they should be encouraged to save the money needed to buy it. When bought out of money saved, they will value it more.Find out about the key concepts you should teach your children in this article .

There are many things that can go wrong when it comes to personal finance. Here are some of the things you must not do:

• No plans Many people go with the flow in life, but this is not advisable in the case of personal finance. Handling finances without any plan can jeopardise your financial position.
• Uncontrolled expenses You must not spend beyond your means. People who don’t follow an expense budget can face many financial difficulties.
• No retirement planning You must have a plan to generate a regular post-retirement income.
• Excessive debt burden Multiple loans and EMIs going beyond the household budget are warning signs of bad financial management. Never borrow beyond your repayment capacity and try to live within your means.
• Remaining uninsured You are never fully prepared for emergencies if you don’t have adequate insurance. It protects your wealth and offers coverage against unexpected issues.

Find out more about mistakes in personal finance in this article .

Good personal finance management makes life smoother and stress-free. By keeping financial planning in mind, you spend judiciously, save more, and invest smartly. By sticking to your financial plan, you can achieve your short and long-term financial goals. In other words, good personal finance practices from your 20s and 30s will sort your day-to-day expenses and also ensure a happy and financially independent retired life.