Personal Finance! A topic that almost everybody on the planet has to deal with yet people have a habit of making blunders about it. It mostly is a habit of ignoring the fundamentals.
Personal finance is the management of money for you as a financial entity. It deals with the money you make and the money spent on chasing your liabilities and personal expenditure. There are always ways and tools to save up on your finances through tax savings and other options.
But first, let’s get to the fundamentals:
1. Scrutinize your financial situation
Determining your worth financially is the base of your financial situation. To assess this your news to go through and add up all your assets
- Total the money in all your bank accounts
- Mutual Fund accounts
- PPF contribution and payout
- Pension plans
- The value of a business and real estate investment
- Money loaned
- Expected future income
- The value of your personal belongings like residence, car, etc.
Petty items such as clothing and food, etc. can’t be calculated in it as they cannot be sold for cash to live on.
You will have to all your financial liabilities separately which include
- Personal Loan
- Student Loan
- Car loan
- Credit cards
- Mortgage on real estate investments
- Mortgage on a residence if the home was included in as an asset
Now you can determine your net worth by subtracting your liabilities from your assets.
2. Determine your financial goals
These goals have many non-financial quotients like emotional, sentimental, career-oriented, wealth oriented, etc. Your financial goals can range from purchasing a house to investing in real estate to investing in stocks and bonds to starting a family to taking a holiday. Some of these are ever persistent goals like planning for your retirement. These have to be allotted even if you are focused on other goals.
A better way is to jot down all your financial goals to set out a clear plan for all your aspirations. This helps your goals be documented and provided for as they do not go amiss in your mind among the cutter.
After writing all your goals you now have to make a decision to number them in the order of priority. This will help you allocate your resources to your goals accordingly.
Tips on making financial goals:
- Long-term goals are like getting out of debt, buying a house, retiring early, etc.
- Short-term goals are like sticking to a budget, saving, clamping down your expenditure, etc.
- Even the long-term and short-term goals need to be numbered according to priority separately to account for their immediateness and value.
Always remember your goals should be realistic and in accordance with your worth and earnings.
3. Make a plan
Now that you have determined your worth and your financial goals. It would all be left with no strategy if you don’t make a plan of achieving it and sticking to it.
The plan needs to have small steps and achievable short-term goals. A step towards a goal every day will find you achieving your goals sooner than you determine. It is because you will make a habit out of not only reaching your goals but also surpassing them and nearing your other short-term goals.
A vital part of this short-term planning would be
- Making a budget
- A spending plan
Things to remember while creating a financial plan
- Your budget is key to your success
- Regularly contribute to your long-term goals
- Build an emergency fund. The lesser the stress the higher your success.
4. Make a budget
Making a budget is essential to making your personal financial mess and further meeting your financial goals.
It is basically a plan to track your income and your expenditure. It sounds simple but most either fail to make a budget and almost all fail to stick by it. The budget will prove to be a backbone of your finances cautioning you towards expenditure and setting you up for priorities.
5. Pay off your debt
Debt is the biggest hindrance to reaching your financial goals. Debt often comes with interest so it keeps increasing with time so it is of vital importance for you to pay off all your debts as soon as you can. There can be seldom other priorities more important than this.
Instead of making periodic and minimum payments towards your debts, make large contributions to the biggest debt and pay it off as soon as you can and move on to the next. This will start a debt payment snowball effect. The earlier you are free, the sooner you can move full steam towards your goals.
It is also wise to not incur debt once you get out of it. Small steps towards it can be
- Leaving your credit card at home to not incur expenses as debt
- Saving up on an emergency fund
Tips to pay off your debt:
- Sell unused and unwanted items to pay your debt
- A side income or an extra job to help you meet your debt payment quicker
- Areas where you can save money to pay debt quicker
6. Pay Taxes
Paying taxes is a vital part of managing finances. People often overlook this aspect of managing personal finances. It not only determines your financial wellness but also showcases your attitude towards being financially fit.
Paying taxes on time avoids penalties and in India, one gets benefits if it is paid earlier.
7. Invest your money
Part of managing your finances is to invest for long-term profits or generate income and compound it.
Determined by the risk appetite one has a variety of investment products like Deposits, Bonds, Mutual Funds, Stocks, Real Estate, Commodities, and Business ventures.
Risk and return often go hand in hand, but it requires the individual to assess and scrutinize the opportunity. We at SDK Investments do just that for you.
8. Plan for your retirement
Planning for retirement is a long term goal requiring constant assessment and allocation.
Managing your finances with the help of a budget and constant meeting your short-term goals might help you to retire early. One has to plan for all the tax benefits and senior citizens’ benefits.