To understand the important factors related to personal finance Key Learning.
Generally, a person starts earning in the age of 22-25 years and continuously works till the age of 60 years. It means a person spends about 35 years in earning.
Your financial decisions and plan during these 35 years will decide how you spend post-retirement life.
You can create “a good and independent financial journey” by keeping in mind the following points:
1. Add Nominees and Joint Holders
- You must add a nominee and joint holder while opening a bank account or investing in financial instruments such as mutual funds.
- With this, your nominee and joint holder could get the financial benefits of your investments in case of your death.
2. Making a Will
- If you have assets, savings, or insurances, then you should make a will to clear your legal successor after your death.
- This will make it clear who will legally get your assets, savings, or insurances.
Adding a nominee and making a will help you in “succession planning”
3. Create Personal Budget
- You should make your monthly budget to manage your recurring/fixed expenses such as rent, EMI, electricity/water bill, grocery, etc.
- If you are earning Rs. 50,000 per month, then you should make a budget of Rs. 25-30,000 to manage all expenses and save the remaining money.
4. Recognise and Manage Your Lifestyle Inflation
- You should make sure that your expenses should increase slowly when compared to your income.
- For example, if your salary increases from Rs. 50,000 to Rs. 60,000, then you should increase your expenses only by Rs. 3,000-4,000, and invest Rs. 5,000-6,000.
5. Recognize Needs Vs. Wants
- You should spend mindfully by recognising the difference between needs and wants.
- For example, having a car is a need but having a luxury car is a want.
- You should focus on your needs and avoid spending on wants.
6. Build and Maintain an Emergency Fund
- You should always have 6 to 12 months’ salary as a reserve.
- For example, if your monthly salary is Rs. 50,000, you must have Rs. 3 lakh – Rs. 6 lakh in your pocket.
- With this,you can confidently focus on your work and meet any future emergency.
7. Say No to Debt
- You should not take loan and EMI as much as possible.
- “EMI ruins a person’s life,” because it unexpectedly increases financial burden.
- You should avoid debt and try to keep your EMI “zero.”
- You should spend to improve your lifestyle only when you have an emergency fund and manage all fixed expenses.
8. Avoid Late Fees
You should always make your credit card payments on time otherwise you have to pay late fees.
9. Avoid Impulsive Buying
- You should not shop in excitement.
- You can avoid impulsive buying by maintaining a budget.
- You should think carefully before buying anything.
10. Invest - Options With High Lock-In Period
You should try to invest in financial instruments which have a high lock-in period. This is a very good way to save your money.
For example:
- In the Public Provident Fund (PPF), you cannot withdraw your money before 15 years.
- In Equity Linked Saving Scheme (ELSS) funds, you can withdraw money before 3 years.
- In the National Pension Scheme (NPS), the lock-in period is 60 years of age.
Thus, you must invest some money in PPF, ELSS, or NPS.
11. Automate Your Investments
You should automate all your investments (SIPs) so that money is automatically deducted whenever you receive the salary.
12. Maintain a Good Credit Score
- You should try to avoid taking loan. However, you must maintain a good credit score.
- With this, you can easily take loan in case of any future crisis.
- You can check your CIBIL score on transunioncibil.com.
- A CIBIL score of more than 700-750 is very good for you.
13. Don't Invest in "Get Rich Quick" Scheme
- You should not spend your money in “Get Rich Quick” schemes, which claim to double your money overnight.
- Investment should be done in a proper legitimate way.
- You should invest in proper financial instruments.
- No one becomes rich overnight, it takes time.
14. Create a Financial Calendar
- You should create your financial calendar to clarify your goals after certain period of time.
- Your goals must be clear with a defined timeline.
- You must attach a date with your goals like 5 years or 10 years.
15. Use 50/30/20 Rule
It means you should:
- Spend 50% of your income on your needs
- Invest 30% of your total income
- Spend 20% on other expenses such as dine out or a tour.
- The 50/30/20 rule helps you in avoiding any financial stress.
16. Protect Your Financial Documents from Misuse
- You should not give your documents like PAN card or Aadhar to anyone without reason.
- Whenever you give any document to anyone, you should make a note of the purpose on the copy of the document.
- For example, if you are giving your documents for opening a bank account, you should write “for the purpose of opening a bank account.”
17. Shred Unwanted Printed Documents
- You should make sure that other people do not see your personal financial documents.
- You should keep your financial documents/reports in an organised manner.
- If you do not need those documents, you should immediately shred.
Key Outcomes
- Add nominees and joint holders while investing in financial instruments
- Shred unwanted printed documents
- Don’t invest in “get rich quick” scheme
- Maintain a good credit score
- Avoid impulse buying