Understand Your Today's Finance to Avoid Tomorrow's Chaos
Posted November 18, 2022 - 5 min read
Personal finance is one of the most important topics in our life but yet it has never been part of our schooling. Even some higher education doesn’t cover it.
What is Personal Finance?
The theoretical definition is pretty simple. “The process of managing your personal finance by understanding purchases, saving, investments and managing it for the long term”
The definition seems to work for all age groups, irrespective of where you work and your country. Certain elements of it might change based on how much your earn, where you live, and your expenses. But the definition is clear and standard.
Why you should manage your finance? (Important)
When you have a source of income, either your own earnings or inherited, you have a big responsibility on you. It doesn’t matter if you earn less or more. If one says that earning less is the reason they don’t do personal financial planning. They are weak-minded and the person with no growth mindset.
Note I am not talking about the INVESTMENT part, but rather more about the bigger picture.
When you start managing your personal finance, you get a clear picture. The picture tells you about what your money is doing. You get answers to some of the important questions like:
- How much you are spending on eating outside?
- Do you spend on things you don’t even use? and How much?
- What areas you could cut expenses?
- Is there a scope to save some more money?
- Do you always have an emergency fund?
These are some but a limited set of questions. The idea for you is to know what your money is doing.
The goal should be to reduce expenses and maximize savings along with investments. While doing that maintain the balance of having a good quality life. Think of finding the best balance for saving money, and expenses. Also, avoid stupid purchases you make on amazon.
5 reasons to why do it:-
- More saving leads to more investment which leads to better return
- Build a habit of understanding your money.
- Avoid stupid purchases.
- You start thinking about long-term financial planning.
- You get a growth mindset and understand the value of money.
Managing personal finance is something you should do every week, month, and year. There is no end to it. To make it more fun, think of it like your own business you are running.
Does it matter how much you earn?
The short answer is NO.
Here is the long answer. Manage what you earn today. You might be earning $100 a day or someone else might be earning $1000/day. Tomorrow you may earn $10000/day. Irrespective of your income, you should make attempt to fulfil the goal we talked about. Here the focus is on managing money rather than growing money. You can grow money only if you can manage it well.
If you can’t manage a small amount, you are bound to screw a big amount.
Managing personal finance is a habit and recurring activity. It’s not a one-time activity.
How to use your income in a wise manner?
Your income can be divided in 3 parts:-
1. Basic Necessity
Open an excel sheet, and calculate your monthly expenses. Remove what is unnecessary and doesn’t add value to your life. The remaining expenses should include your grocery, utility bills, transport etc. Expenses that helps you run daily basic needs. Take note of the amount. At the end of every month, make sure it doesn’t increase without a valid reason which makes sense. Keep this amount aside in safe hands the day you get your salary.
2. Happy Moments
Don’t live a boring life but also don’t spend in adhoc or in senseless manner. Have a budget you can use every month for your happy moments. It can be movies, parties, shopping, buying novels, or hobbies you might have. You can also be a bit smarter and save this for 2-3 months. After which you can take a trip or travel to a place.
3. Future Growth and Investment
Money can help you create more money. No, not by gambling. But by investing it at right place. There are a lot of options out there for Investments. Stocks, deposits, bonds, real estate etc are options to start with. Read articles, books, and news about it every week to understand what works best for you. Each person has a different risk appetite. Don’t risk your money in greed. A safe 8% return is way better than risked 20% return. Invest every month without missing. The best would be to do it at the start of the month. It will make sure you don’t land up in a situation where you have used your investment money for something else that was less important.
People follow different rules for dividing income. What works for me, may not work for you. But goals should always be towards managing money and keeping growth in mind.
Example of a rule:
40% of your monthly income on Basic Necessity
30% of your monthly income on Happy Moments
30% of your monthly income on Investments
Last but another Important - Emergency Fund
Life is unpredictable. and let’s be practical about this part. One may lose the job and have extra medical expenses. You may want to put extra money into moving to another city or spend money on the repair of the house. None of these fall under basic necessity, happy moments, or investments. These are unplanned and unexpected expenses. If possible, have a separate account where you put this money and do not touch it. Unless it’s actually an emergency. And yes, shopping is not an emergency.
You can grow and live a happy life with money. Be wise about it. The more you disrespect it, the more you will degrade it.
To summarize the thought:-
- Be serious about managing your money, be wise.
- Don’t fall for stupid marketing on the internet and spend money
- Calculate expenses and keep track of it on monthly bases
- Invest more and more. It will do wonders for you.
- Remember, you can apply to whatever income you have.
I hope it helps you understand basic on personal finance. For any questions or feedback, reach out to me.