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Language of money is one of the most essential skills that should be taught to everyone, sadly it is not the case. It neither features in formal educational curricula nor is taught practically with related subjects. Most of the new earners take years to even start caring about savings, let alone financial planning. This article brings you the six essential steps towards robust personal finance. It deals with all the benefits one can get with sound knowledge of money from the beginning and how you can develop this vital acumen of personal finance to achieve all your long-term financial goals.

1. When, where, and how to start?

Financial planning should start right from the time you start earning. It could not be possible for some as their expenses towards basic needs eat all their earnings. They can wait a while until their income goes up. If the growth potential is bleak, they can acquire new skill sets with the help of available online and offline courses, which will give their career a much-needed boost. Some say, investing in self to acquire skills is the best investment one can make. This could help you achieve unexplored level of success.

Once your earnings exceed your basic needs considerably (at least double of basic expenses), you need to practice savings for the long term. At least 1/3rd of your income should go for savings with a long-term horizon. Savings is a good habit but inflation can eat most of your savings. In a developing economy like ours, inflation can rise in the range of 6 to 10%. One needs to make mindful decisions while dealing with inflation. Parking your funds in the right investment vehicle can help you beat inflation. This is the first step of the six essential steps towards robust personal finance.

2. Beat the inflation

Just saving a part of your earnings in a savings account will bring you more harm than benefits. Most of the time traditional investments like fixed deposits, recurring deposits, traditional insurance policies, etc. do not fare well in the race against inflation rates in the long term.

Traditional investments will give you returns in the range of 4% to 7%, whereas in a developing economy like ours, the inflation rate may rise by 6% to 10%. Choosing the right instrument to park your savings is crucial.

It will not only ensure that the investment beats inflation, but it can also fetch you good returns over a period. Whenever you are thinking of investing for a long, always keep an eye on beating inflation. This is the second step of the six essential steps towards robust personal finance.

3. Power of compounding

For any long-term investment, compounding helps investment to grow exponentially. It’s a phenomenon where after a period, the grown returns also start giving returns.

Compounding leaves a great impact on the corpus of the chosen right investment with a long-term horizon. E.g. if you invest 1 lakh every year in a financial instrument that gives 8% returns throughout 15 years, the value of the total corpus would be 34 lakhs whereas staying invested for one additional year will increase the corpus to 39 lakhs, a whooping rise of 5 lakhs.

The latter stages of investment bring higher returns for the investors. These higher returns are due to the power of compounding where investors earn higher returns in later stages of the investment life cycle. This is the third step of the six essential steps towards robust personal finance.

4. Savings vehicles

Whatever funds you are left with after the expenses, that is your savings. These savings can be parked into savings accounts, RDs, FDs, liquid funds, government securities, etc. It will not lead to great returns but the principal amount is safe.

These savings instruments are good for those looking for short-term savings with safety. In these instruments, you can expect annual returns in between 2% to 7%. The rate of return can change as per the monetary policy of the central bank which depends on macroeconomic factors.

Savings in these instruments can help you meet any exigency as your principal amount is safe. For long-term financial objectives, you should investigate investment vehicles. This is the fourth step of the six essential steps towards robust personal finance.

5. Investment vehicles

Choosing the right investment vehicle is essential for the investor. It has to do with multiple factors like age, demographics, inflation, lifestyle, etc. This is the fifth step of the six essential steps towards robust personal finance.

Many investment options can be used to get the most out of your saved income. Some of these are discussed below.

• Equity stocks: – stock investment is one of the most common and known phenomena among investors. Investing in the right equity stocks for an extended period can give handsome returns that will help to reach your long-term financial goals. Proper diligence and awareness of market trends are essential. This investment can turn out risky. Equities can give good returns in the short as well as long term. The decision of choosing scrips can be made by using fundamental and technical analysis for long-term and short-term terms respectively. Investment should be for a long-term horizon.
• Mutual funds: – Mutual funds are a very popular way of investment. Mutual funds are suitable for all types of investors as they can be started with a very low amount. Mutual fund is offered by many banks and NBFC so it is very much accessible to all. Those who do not understand the market forces and cannot dedicate some time to the market should go for Mutual funds as it does not demand active participation. Mutual funds can be made by anyone with no knowledge of the stock market.
• ULIP (Unit-linked investment plans): – ULIP has gained a lot of popularity among customers in recent years. It is a product that is a mixture of growth perspectives like mutual funds and risk coverage like insurance. It is offered by insurance companies, where traditional plans are more inclined towards fixed and guaranteed returns, here returns are linked to the market similar to mutual funds.
• Government schemes: – a handful of government schemes can be a great avenue for investment. Schemes like PPF (Public Provident Fund), SCSS (Senior Citizen Savings Scheme), SSY (Sukanya Samridhi Yojna), etc. can yield good returns over a period. These investments are safe compared to others as they are backed by the government. On top of that you may get tax benefits.

6. Risk assessment and response plan

Risk response planning is all about identifying the possible risks, and ensuring proper provisions like avoiding, mitigating, accepting, and transferring. This is the sixth step of the six essential steps towards robust personal finance.

• Diversification of investment: -As the old saying goes “Never keep all the eggs in one basket”, similarly investment should never be concentrated in a single asset class. Investors should diversify investment by spreading it in multiple asset classes. This will help investors to get a multi-faceted approach towards investment. This habit of diversification helps investors to have better risk management with good returns over a long period. A diversified portfolio not only helps investors minimize the financial risks against adverse scenarios but also helps investors take a hawk-eye view of the overall market that acts as a compass for other investment avenues.
• Emergency funds: – The motto of risk response planning is to avoid unwarranted challenges that can hurt where it pains the most. The motto of setting up an emergency fund is the same. We should have at least 3 to 6 months of income in liquid assets to avoid any such emergency. The emergency could be loss of job, illness, accident, delayed salaries, delayed payments, etc. In such a scenario, this emergency fund can help you without disturbing your long-term financial goals. It will act as insurance for your long-term financial goals.
• Sufficient insurance: – buying insurance is one of the basic risk response measures we must take. Insurance is of two types life insurance, and non-life insurance aka general insurance.
  • Life insurance covers the mortality coverage whereas general covers the rest. While planning life insurance specifically term insurance, you should consider at least 15 to 20 times your annual income as the coverage amount. In the occurrence of an unfortunate demise, this insured amount will help the family for future needs. It will also help you to save some tax as it provides a rebate under section 80C.
  • Nonlife insurance covers everything except life. The most important contributor to nonlife insurance is health insurance. We must consider health insurance for all as it helps to guard our savings from unwarranted medical emergencies against a regular annual premium amount. Sufficient health insurance ensures good medical treatment without getting worried about the medical bills. Other general insurance is either important for legal or other compliance. General insurance helps to safeguard other things like property, furniture, etc. so it holds its importance in saving against unwarranted losses.

Conclusion

A basic understanding of finance is necessary for all of us. It imparts the knowledge about money and it ensures proper utilization of available funds. One needs to understand different facets of life and how one should create provisions to cater to sets of essential requirements throughout life. A few things that everyone should keep in mind while planning your finances are

• Avoiding unnecessary expenses
• Ensuring contingency funds
• Opting for sufficient insurance
• Investments over savings that beat inflation
• Diversify your investments by exploring multiple investment vehicles
• Investments with a goal that will decide the horizon of the investment

The six essential steps towards robust personal finance will ensure a better, balanced, and healthy financial future for most of us.

Frequently Asked Questions

Q1. Why do we need to learn personal finance?

Ans: – Personal finance imparts the much-needed ideas related to money. It gives a basic understanding of how money operates and what one should do with their earnings. It helps them to make sound financial decisions that will help them build a stable, healthy, and balanced financial position in the future.

• A sound knowledge of personal finance helps us to know the essential financial aspects that we need to plan
• It helps to understand a different financial instrument that helps to achieve financial objectives
• It helps to plan for unwarranted risks in an optimum manner
• The optimize the use of money we need to learn the language of money

Q2. What should be the list of priorities while planning personal finance?

Ans: – as the name suggests, personal finance is personal to everyone. It depends on various factors like income level, liabilities, future planning, retirement, lifestyle demography, etc. so it varies from person to person and with their financial objectives. A basic priority list that can be devised for a salary individual is given below

• Necessary expenses that cover basic needs
• Savings for exigencies
• Insurance
• Investment for child education, marriages, retirement
• Investment for other long-term needs
• Expenses towards not-so-necessary needs

Q3. Whether taking debt is good or shall we avoid debt?

Ans: – whether taking debt is a good thing or not depends on a few attributes which are mentioned below.

• Application of debt decides whether taking it is a good or a bad decision. Opting for a debt for the creation of appreciating assets can be considered a good. Whereas opting for debt for consumption should be avoided, it can land you in financial troubles.
• A debt should be in resonance with the income levels. Debt is a promise made by the borrower to the creditor that he/she will return the money in the future means you are taking money from your future income. The borrower should ensure that the money that will be taken from future income should not put a heavy dent in their future financial position.
• Debt taken for the creation of capital assets should ensure that capital assets give far better returns than the interest rates against the debt. It will help to keep the borrower solvent and avoid the risks of debt burden.