Guide on your Personal Finance Management
Personal finance management helps to plot our future appropriately. Use these handy techniques to managing your personal finance.
1. Know your Expenses:
The very first step is to know your actual expenses of a particular month and then make a classification of those expenses, like:- fixed and variable .
Fixed expenses are those which you have to pay the fixed amount whether you use it or not, like- house rent, school fees, insurance amount, loan amount, etc.
Variable amounts are those which completely depend on the usage, if you don’t use it then you don’t need to pay, like- travelling expenses, buying clothes, etc.
Savings depend on the effective usage of the items variable expenses items.
2. Know your short term, medium term and Long term Goals:
These are the special things which you want to fulfill and these are not related to your daily expenses because you have to pay the daily living expenses irrespective of every situation. Sometimes, we can’t fulfill these dreams and forced to compromise with the situation only for the lack of proper financial planning. But with a proper personal finance planning, we can fulfill most of our dreams (Of-course, don’t make a plan for a vacation in MARS!!!). So, before preparing your budget, know your short term, medium term and long term goals.
Short term goals are anything which has to fulfill within 1 year of time, medium term goals range in between 1-5 years and long term goals are the target to be achieved beyond 5 years.
These short term goals may be repetitive in nature also, like- yearly vacation tour, buying gift for loved ones on special occasion, etc.
Medium term goals may be buying car, international tour, etc.
Long-term goals may be higher studies expenses of your little one, buying a house, having a safe and secure retirement life, etc.
3. Prepare a Budget:
Depending on a month’s actual expenses, make a monthly budget . Suppose, your monthly salary is $ 5000 from your main job. Now deduct the fixed expenses from your main income.
There is no area to control these fixed expenses but you can control the variable expenses, like- gas and electricity bills, grocery bills, travelling expenses,etc. So, try to keep these expenses at optimum level.
Depending on your 2 months’ average variable expenses, make budgeted expenses on every field of expenses, this will keep control your expenses. After you have listed your income and variable and fixed expenses, make sure that the expenses do not exceed the percentage you have set for that category. Some professionals suggest limiting the necessities to 60 percent of your income.
Try to save at least 8-12% from your main monthly income on every month.
It will be best if you transfer this amount to your different investment account on SIP basis as soon as the salary credited to your bank account. Because as per the studies, we tend to spend more money if we have more in hand .
4. Proper Allocation of assets:
For this purpose, always take advice from a good Financial Planner. If you find it little bit costlier then take these 2 simple approaches to allocate your asset.
Type1 Asset Allocation: Very easy to follow
Everyone needs 5 things, health insurance, retirement fund, life-insurance (specially for the person who is the only bread-winner of the family), Contingency fund and Child Education Fund (if any).
Divide this 12% investment amount in a very simple form:-
Type2 Asset Allocation: It’s wise to follow
If you have just got your first job or have just entered into your family lives then do your investment and insurance planning in the following way:-
a. First make an Emergency Fund:
This is the fund which will be built to meet any emergency requirement, like-a family member got admitted in a hospital suddenly and you need huge amount of liquid cash and insurance amount may not fulfill your requirement. Make 2-3 months full salary amount as Emergency Fund. Keep it aside as liquid and don’t spend single a penny from this fund unless you truly need this.
b. Adequate amount of Health Insurance and Life insurance:
Make adequate amount of health insurance for all the family members. Then make life-insurance of the sole bread-winner of the family and if possible then others also.
c. Then make a Contingency Fund:
To support any unforeseen situation on the event of loss of regular income. This fund should be made in such a way that your family can maintain the same lifestyle at least for next 6 months so that you can get enough time to look for any other good income source.
d. Know the goals very clearly and make investment on that basis:
Now, you are ready with 2 funds and insurances to protect your family from any emergency and unforeseen situation. It’s time to think on other goals.
I’ve already discussed on different types of goals. Discuss with your family members and put a time-frame on every goal. Then make your investment as per those goal time frame.
You can invest your money in Equity investment for the long-term goals because Equity investment for more than 5 years is safe and rewarding. To know your risk appetite, click here.
Then for medium term goals, play strategically. Put half the amount in debt instrument and 25% in Equity and 25% in Cash or Gold.
5. Increase investment as income grows:
Most of the people do not match their investment with the increase in income. This should not be. Whenever you get a rise in your income, allocate half of the additional income to savings/investment. You’ll not feel this difference because you are enjoying the other half.
6. Try to find out some other source of income:
It is always advisable for a family that not to depend on a single income source. Always look for some extra income source. If you are the only bread-winner of your family and you have no time to looking for other sources of income then encourage your spouse to do something on his/her leisure time . This amount of money may be very little at beginning but you don’t know, this may be a BIG ONE and may be the primary income source of your Family. So, always keep trying to look for other income source. Here is a guide where you can get some easy and legal ways of earning.
Now you are ready with your Personal Financial plan.
To get more on this Personal Finance Planning, Click Here.