Managing personal finance is one of the most important aspects of one’s life. Not being able to do so is why many people are in debt, with several struggling to meet their expenses and address future goals. If you are looking for basic guidelines on personal finance management, this article can act as a handy guide.
Read on to know the 10 commandments of personal finances that can help you manage money better. But first, let’s understand what is personal finance?
The basic financial cycle of a person involves earning, spending, investing, and saving money. Personal finance refers to the process of understanding your life goals and managing your financial activities accordingly. These may involve income generation, spending money, saving or investing, among others.
In other words, personal finance refers to the art of knowing your financial goals and creating a plan to achieve them.
As mentioned, managing personal finances is one of the most important things you should do in your life. Personal finance management becomes crucial to ensure that you meet your goals and achieve financial freedom. Without proper planning or management, you may fall into debt and may have to live a highly stressful life.
In a nutshell, personal finance management entails creating a financial plan to meet all these goals with whatever projected earnings you make in the upcoming years. You need to know how much you should save, spend, and invest to meet your financial goals.
To guide you in managing your finances, we have listed down the ten commandments of personal finances. These commandments are nothing but a few simple instructions that can help you manage your finances in a better manner.
The first and foremost thing you should do is decide on a budget for yourself. It serves as the blueprint to manage finances. Your budget should include your monthly expenses, EMIs, and insurance premiums, among others. Many online budgeting tools can help you prepare your budget effectively.
All you need to do is enter your monthly income and expenditures, and your rough budget is displayed in front of you. Once decided, you should stick to your monthly budget. Never go beyond your budget, as it can hurt you in the long run.
The second commandment requires you to understand the difference between your needs and wants. There are some expenses that you can’t do without, and these are known as needs. Examples include monthly groceries, electricity bills, tuition fees of children, and so on.
On the other hand, there are expenses that you can do without, and they are classified as wants. For instance, dining out every weekend, buying the latest smartphone, and so on. A sound personal financial management tip entails spending more on needs and limiting expenses on wants.
Saving more and spending less is one of the essential personal money management tips you should follow diligently.
Judicious saving and prudent investing will help you accumulate funds for your future goals and be prepared to tackle emergencies.
After you have established a budget for yourself and have minimised your spending, the next thing to do is pay off your high-interest debts such as credit card dues and personal loan EMIs.
These debts can strain your finances, and clearing them at the earliest can help you fortify your finances.
As mentioned, credit card dues attract a very high interest of up to 30% per annum. Hence, it’s better to pay off your credit card dues every month and stay out of this debt.
Every credit card issuer provides a 20-to-40-day interest-free credit period. If you clear your current credit card dues during this period, you don’t have to pay any interest.
It’s crucial that you involve your spouse in your financial decisions. Both of you should work as a team and not as individuals.
Keep your spouse in the loop about your financial activities and seek active support in any decision, big or small. Support each other to achieve collective goals. If both of you are earning, you can split your financial duties and prepare a combined budget.
An emergency can arrive anytime and erode all your savings if you aren’t prepared. Situations such as a sudden medical contingency can throw you into a huge debt.
To avoid being in such a situation, you need to create an emergency fund. As per the golden financial rule, you should invest at least 10% to 15% of your monthly income towards building an emergency corpus.
This is one of the effective ways to manage finances. Taxable investing accounts offer multiple benefits. Though these accounts don’t provide any tax benefits, they offer more flexibility and liquidity to investors.
A taxable investing account has no upper limit and lock-in period for the investments. A brokerage account is an example of a taxable account.
There are two ways to invest – active or passive. Active investors try to make the best out of the market by investing in stocks expected to do well in the future.
Passive investors do not try to time the market and instead allow their investments to grow in the long-term. Unless you have adequate knowledge and experience, you should engage in passive investing only.
This is one of the crucial personal finance management tips. It never makes sense to put all your eggs in one basket. You should always diversify your investments in various investment avenues such as stocks, bonds, mutual funds, commodities, and real estate.
Diversifying your investments not only reduces overall risk but also increases your chances of gaining inflation-beating returns. It also stabilises your portfolio.
Now that you know how to manage personal finances, you must start walking proactively in the right direction. Remember that failing to plan is planning to fail. Decide your financial goals and be determined to accomplish them.
Following the 10 financial commandments mentioned above can help you effectively manage your finances and be on your path to financial freedom.
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