The foundation of personal finance is based on three elements: income, savings and investments. You need all the three legs to stand on the financial stool as they are all interlinked and you cannot look at investments in isolation. This is the first rule of personal finance. And your financial chain is only as strong as the weakest link. So you need to make sure you boost your income, save enough to meet your financial goals and put your money to work in such a way that it earns the best possible returns with the least possible risk. Here are some of the things you should do.
Look at the big picture Your finances are not just about investing. They are about your financial position, spending habits, taxes, savings, insurance and major financial goals like buying a home, retirement and marriage. Investing is just the part you can look at if you save enough. But for most of us, spending, saving and investing
come in fits and starts without any cohesive plan. As if
life were not complex enough, most of our information
on financial products and advice comes from advertising or magazines that thrive on advertisers. No points for guessing the claims and counter claims that you read could be downright false and misleading.
The problem with personal finance is that the blunders
we make take months and years to show up. For example, people realize Just a few years before retirement that they don't have enough to retire on and start scrambling. But it is already too late.
Your are unique and you must chart your own course Your financial needs don't match those of anyone you know. So you will have to get to work and figure out where you are and where you would like to go yourself.
Income, the fountainhead of personal finance What you earn has a direct bearing on what you save and eventually what you will invest. Whether you get a salary or are self employed, income is the basis of all financial planning. We still live in an economy where salaries are enough to sustain our lives, but in most cases not enough to build wealth. However, what your income is will decide the absolute amount you save and the investment options open to you. Let's say you save around Rs 5,000 a month. You can look at buying mutual funds to park your money. But if you save around Rs 2 lakhs every month, a whole lot of investment avenues open up for you.
What happens to your income consumption and spending What do we do with what we earn? In most cases, the following big ticket items eat up big chunks of income.
1) Loans and rents: House instalments, car instalments,
credit card dues and other loans take up a substantial part of our income, specially when we are Just starting out in life.
2) Consumption or day to day expenses: Heard yourself say, 'Life's getting expensive') The kids absolutely need the toy, the wife absolutely needs the necklace . . . need I say more. Add to that the list of unavoidable expenses like house rent and utilities.
3) The taxman: Most of us end up paying taxes and if we are not paying them, we are postponing the inevitable. The taxman is getting smarter and automated and he will collect sooner than you think.
4) Savings: Usually that's where the crumbs and leftovers of your income end up if there are any. And this applies to any and every income strata. That's because everyone tries to live like his or her peers and spends accordingly. Most of us keep saying, 'I can't save anything,' 'My savings are not enough.' Let's change that starting today. The good news is that with a little planning, you can control your tax outgo, your consumption and even your loan payments. Every rupee saved will add to your savings and give you more latitude in meeting your investment goals.
