Today’s world is consumption driven, in this age of 24*7 TV, popular social media apps, the celebrity cult has led to generational behaviour changes, our youngsters have a sense of entitlement, they want everything, whether they can afford it is a question best answered some other time. In this environment, it’s therefore important to educate the younger folks basics of personal finance, concepts like, saving for a rainy day, retirement planning, the power of compounding are few things that every adult should be familiar of.
Knowledge is the key to success in personal life as well as in investments, although, today’s generation is a step ahead in terms of being able to gather information from different sources, be it print media, TV or social media, the key is to be able to analyze all information available to us objectively and to turn information into knowledge that can be used constructively in one’s personal life.
The basics of financial planning are not as sophisticated as they are made out to be by personal finance experts, the key to success of a financial plan lies in it’s implementation, for e.g. we all know that one should save, however being actually able to save is the hard part.Below are a few thumb rules that can help individuals with their personal finances.Develop a habit of saving early on in life, a set percent of one’s earning should be allocated to savings before any expenses are made, as a rule, income minus savings should be the allowable expense rather then the other way around.
- Develop a habit of saving early on in life, a set percent of one’s earning should be allocated to savings before any expenses are made, as a rule, income minus savings should be the allowable expense rather then the other way around.
- Create an emergency corpus that is accessible at all times, as a rule of thumb emergency corpus should constitute enough funds to support one’s living expense for at-least six months.
- Buy a health insurance policy as early as possible and it should cover one’s entire family, health care expenses are the leading cause of bankruptcies and this situation can easily be averted by sufficient coverage for the entire family.
- Be adequately protected through life insurances, an adequate coverage is at-least 10-15 times one’s annual income. Term insurance is the most effective way to get life insurance, the premiums are low as it’s a risk cover and provides financial protection to one’s dependent in case of sudden loss of life.
- Do not overdo on regular life insurance policies, although on the surface the benefits of a life insurance policy sound extremely good however on a closer look the actual returns on these policies are sub-par and can barely beat inflation.
- Never mix investment and insurance together, it’s better to stay away from investment plans, which pretend to be insurancepolicies such as endowment plans, Ulips, andmoney back plans.
- Avoid taking on debt as much as possible, only take loans under un-avoidable situations, use credit cards sparingly and make full payments on the credit cards at the end of the month. Efforts should be made to avoid personal loans unless it’s absolutely necessary.
- Always make a healthy down payment when it comes to buying pricey assets such as a car or a house. If one wants to own a house it is advisable to purchase ready to move in properties rather then under-construction ones with the long delivery schedule.
- Avoid making lumpsum investments, even when it comes to making tax saving investments, spread them out throughout the year rather than making all investments in one go.
- Divide your financial goals into long term and short term goals and create a investment plan that address all financial needs, one should also start saving for retirement early on in life, the corpus of funds needed post retirement must be calculated accurately, future health care costs and inflations should always be factored in while creating a retirement plan.
- Always opt for a diversified investment portfolio with a healthy mix of all asset classes such as equity, debt, bullion and real estate. It is advisable to have a decent exposure to equity at-least early on in one’s professional career as equity exposure helps generate higher returns. One can slowly reduce the exposure to equity over time and towards retirement the exposure to riskier assets should be minimum.
- Risk averse investors should opt for mutual fund route to gain exposure in equity, investments in mutual funds should preferably be made through a Systematic Investment Plan (SIP), one should always opt for direct mutual funds to minimize cost of acquisition.
- Do not follow the herd and never take any investment advice on face value, efforts should be made to understand the risk-reward proposition of all investment ideas, if one is unable to analyze an investment opportunity independently, there is no harm in taking professional help.
The basic’s of personal finance are not hard concepts, the key to successful personal finances lie in the execution, the ability to save and the insight to invest those savings towards the achievement of one’s financial goal can be achieved by following few thumb rules that have been listed above.
This article is contributed by Mr.Rahul Agarwal,