When we talk about personal finance management, the simplest explanation of this term is earning enough to manage one’s daily or monthly expenses and saving enough for the future. This basic management is done by every individual for all their lives but the difference between having a healthy and quality life and a struggling existence is often the key between good and bad personal financial management.
Importance of personal finance management
Personal finance management is crucial for every person mainly to ensure that they have a comfortable present as well as secure future. There are several benefits of having healthy personal financial management. Some of the benefits or the importance of having good personal financial management is mentioned below.
- It helps the person cultivate the habit of budgeting their expenses and avoid unnecessary spending or prioritize their spending effectively.
- Another benefit of having good personal financial management is being able to allocate the resources properly and thereby using the available cash flow efficiently.
- It helps them save money and allocate it for sound investments on a timely basis.
- The benefits mentioned above also help the individual avoid any unmanageable debts and stay on top of managing their needs.
5 important aspects of personal finance management
Personal finance management can be essentially explained through five major aspects or pillars on which your personal finance management is based. These aspects help in effective personal financial management. The details of these aspects are mentioned below.
- Consider your Income
The income of a person is the basis of personal financial management. Such income includes all the sources of income whether direct or indirect. Direct income will include the salary or profits from the business or professions. Indirect income on the other hand is additional sources of income like dividends, interest income from bank FDs or bonds or other types of investments, rent income, etc. The income received from all these sources is pooled to get the total spending power and make a proper plan for the budget.
- Expense Management
When we talk about the expenses of a household, we usually think of the day-to-day expenses. An effective personal financial management accounts even for the unforeseen expenses and plans for them effectively. It is ideal to have a small amount set aside each month for such unforeseen expenses so the individual is not burdened or short of funds at the time of need. Besides planning for such unforeseen circumstances, it is also important to create a fund for leisure expenses like travel. In short, effective personal financial management is allocating optimum funds for all the needs of the individual and maintaining a fine balance.
- Savings are essential
Savings are the surplus funds that are left after budgeting or allocation of the funds for all the essential expenses. It is also the other side of financial management that is as essential as having a steady source of income. An individual should strive to save no matter how small the amount is from each month’s income. This habit will help them gradually increase their savings for long term expenses or investments. This will eventually help the individual in building a strong and safe financially secure future where they will not have to be dependent on anyone else.
- Investment to grow wealth
Money generating money is the best form of savings. Savings are best utilized when they are invested in good assets or investment opportunities that will help them grow at a consistent or better yet at a faster rate. Individuals have to pick investments that meet their risk-return expectations and eventually their investment objective. Some of the most common types of investments that can provide investors with good returns are mutual funds, fixed deposits, real estate, government bonds or corporate bonds, stocks etc. Individuals can also take professional help to get the best investment portfolio and to maximize their returns.
- Insurance for emergencies
This is an important aspect of personal financial planning or management but is often not given its due importance. Most people even today do not have basic term insurance or even health insurance. Insurance is an important tool to safeguard the family’s survival in an unfortunate event, especially if there is only one breadwinner in the family. Property insurance is also to be considered to safeguard the assets of the family.
Key points or principles of personal finance
Personal finance management is based on a few basic principles. These principles help understand the nuances of personal financial management and enable the individual to make effective financial decisions. These principles are discussed below.
- Setting priorities
The most important principle of personal financial management is differentiating between what is an urgent expense or need and what is not. This will help the individual in allocating the resources in the right direction. This can also be called goal-setting.
- Assessment of needs
Like any organizational needs, personal finance management also involves constant review or assessment of needs and priorities. In a household, priorities can keep on changing based on the needs of the family members. It is essential to assess these needs and address them based on their revised priorities.
- Restraint on expenses
We all know that budgeting is an essential part of personal financial management. But sticking to that budget is equally essential without which the whole exercise has no point. Hence, one of the other essential principles of personal financial management is a restraint on expenses.
Additional points to consider
Besides the points mentioned above, individuals also have to account for two other important aspects of personal financial planning. These are tax planning and retirement planning. It is important that the individual does not ignore them to ensure that their financial planning does not go for a toss on account of unavoidable expenses like taxes or they do not have any funds left to manage their expenses at the time of retirement.
- Tax planning
Taxes are an important expense that cannot be ignored. The interest and penalty on tax due that are not paid is quite high. But the Income Tax Act has provided us with many options to save tax. This helps in reducing tax liability and making substantial investments at the same time. An effective personal financial management aims at reducing the tax burden on the individual
- Retirement planning
Retirement planning requires the individual to have substantial investments or funds in place to take care of their needs at the time of retirement. It is an important aspect of financial planning and should not be ignored. Planning for retirement in the later stage of life will not benefit the individual as much as starting early.
Personal financial management is done by every individual on some level. The key is to strike the right balance between income, expenses, savings, and investments. This balance will ensure that the personal financial planning and management of the individual are optimum.
1. Can a person start retirement planning in their 50s?
A. Yes. Investment towards one’s retirement can be started in the 50s as well. However, there will be limited time to accumulate the necessary funds. Hence, it is advisable to start retirement planning right from the start of the first employment or as early as possible.
2. Are taxes mandatory for everyone?
A. Yes, everyone who has a taxable source of income is liable to pay taxes. But there are basic exemptions available.
3. Is personal financial management necessary for everyone?
A. yes personal financial management is essential for every individual no matter the age and the earning capacity.
4. How to invest in mutual funds?
A. Investment in mutual funds can be done through any registered broker or directly through the fund house. Investors can invest easily through the Fisdom app. Once registration is done, investors can select the fund to invest in from the multiple choices and pay the investment amount through the online payment modes.