5 points to manage your personal Finance

Personal finance is something that bothers all of us every day, every week, every month and every year. Financial Literacy as a concept has never been given its proper importance in India. Primarily, because wealth creation in India had always been a synonym of real estate. As there were not many investment options available in the past. So, the best practice had always been to channelize the money into gold or real estate. But this is not true in today's rapidly growing and changing world. Personal finance is no more limited to just one or two factors.

Personal finance has everything to do with managing your money and saving and investing. It covers budgeting, banking, insurance, mortgages, investments, retirement planning, tax planning and estate planning. It often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.

Personal Finance has gone beyond just wealth creation. It is about managing your various other goals as well. Whether it is meeting your short term goals, accumulating a fund for your retirement or planning a world tour. You name it and you have an avenue for each of your goals.

However, the last couple of decades of globalization, the evolution of financial markets and penetration of internet through smartphones has completely changed the landscape. While this brings more options to us, it also adds to the complexities of financial planning.

Given Below are the few points that should be kept in mind for a financially secure future.

1. We have limited time.

Though life expectancy has grown by 4 years during the last decade to 68 years of age but so did the number of sudden death. Thanks to our busy work life and hectic daily routine the number of case of diabetes, heart disease, lung disease and stroke have caused around 40 % of the death. Well, plan before its too late.

a) Plan your will ( these will lead to a hassle-free transmission of your wealth to your nominee)

b) Cover your life -Plan your adequate term insurance (it is never a good idea to mix your insurance with your investments. Endowment plans and ULIPs are a no-no) 

c) Cover your health- ( Read and understand the policy terms, exclusions and sub-limits, remember cheaper is not always better)

d) Share your investment details with your spouse and family. Introduce your spouse to your finances and obligations.

2. Beware of silent killers

Inflation and tax kill your money - plan for them wisely.

Inflation is nothing but a deterioration of the purchasing power of your money. 

For example, if you can buy 5 mangos with Rs.100 today, you might won't be able to buy even 3 for the same amount 20 years down the lane. 

Invest smartly, chose your instrument with an inflation-beating return. No point of keeping your money in the saving account and earning 4% p.a. when inflation is 7 % p.a. 

Similarly, Factor in your taxability while choosing your investments. Don't be lured by the 8 % return, when actually it will be 5.6% post-tax return. ( assuming 30% tax ).

Invest in tax saving instrument but never invest just to save tax. ELSS is one of the best tax saving and inflation-beating instrument.

3. Compounding the 8th wonder.

Compounding is a long term investment strategy. where you get interest or dividend or add on on your principal and again on your principal plus your interest, dividend or add on. 

For example, when you own a mutual fund, compounding allows you to earn interest on your principal. Compounding also occurs when you re-invest your earnings. In the case of mutual funds, this means re-investing your interest or dividend and receiving additional units. By doing such a thing, you are earning a return on your returns and the principal. When the principal is combined with the re-invested income, your investment will grow at an increased rate.

Let us understand the power of compounding with the help of the table given below:

The table shows the amount and percentage growth of Rs. 50,000 @ 10% on various time horizons. 

The amount can grow up to 900% percent in just 20 years, that's what the power of compounding is. 

4. Invest for freedom and not be rich.

Remember, after a certain amount of wealth it doesn’t really matter how many zeros are there on the right side of your bank balance. So target to achieve financial freedom. List down all your life goals and fund required for them. If goals are within a year, invest in FD/ short term debt funds, for goals in 3-5 years invest in large-cap equity funds, and for goals beyond 5 years investing in mid and small cap funds. As far as possible, automate the investment process and the amount should be automatically deducted from your account and invested in the fund. This brings great investing discipline and leads to long term wealth.

5. Upgrade your self with the basics of Personal Finance.

The world of finance is ever changing and evolving. It is growing at a  pace of a rocket, never miss a chance to upgrade your knowledge. Learn about the techniques, new instruments, catch up with the yearly change of taxation. 

You need not to have full knowledge about them but start with basics and let your advisor get look into all the complication but you at least need to have a basic idea.