Things you should do to effectively manage your Personal Finances
Remember the time you bought a piggy bank and convinced your mind and parents that everything was going to change from then- it would be your first step towards getting rich as you will prudently invest money you save in your small in-house bank. Now that you remember, you must be laughing at that innocent idea. Of course, that piggy bank disciplined us to save money regularly and curtailed our expenditures on unworthy things, but did it really make us any rich? No, in fact, it did make us poor if we keep in mind the concept of inflation. Inflation is a sustained rise in the general price level of goods and services in an economy over a period of time.
Read this small story to better understand the crux of inflation:
Sameer is any regular 25-year-old guy who works in a local bank on a meagre salary. Tomorrow is his girlfriend’s birthday. He wants to take her on a dinner date at a posh restaurant where a table costs around 2000 bucks. He calls the restaurant today but is unable to find any vacant table. He is sad and plans to save for her next birthday a year in advance. He takes a newly minted 2000 rupee note and keeps it in his locker. Next year, he again calls the restaurant hopefully. Sameer is lucky to find a table but that table now costs 2500 bucks!
So, you see how inflation has dented his hopes. It reduces the value of money over time.
What 2000 bucks could buy a year earlier requires around 2500 bucks now. Therefore, it has become imperative to manage one’s finances in a prudent way considering long and short-term goals. These goals differ with age due to the nature of their work and hence necessary to have different portfolios.
Before we move towards ways to effectively manage finances for different age groups, its critical to understand in brief about portfolio management which ways a vital role in determining whether you invest more in equities or debts.
Portfolio management is the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance (Investopedia).
Portfolio management is all about the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a given appetite for risk. Equity promises a much higher return than debt but also contains significant risk of losing money. On the other hand, debt offers a low but regular return on your investment.
Now suppose you have just started earning money. Your portfolio should include more investment in equity as the retirement age is not hovering near and you need funds to sponsor your dreams and goals.
The general rule says the equity composition in your portfolio should be 100 minus your age. The younger you are, the more equity you should hold. However, one should not take it seriously and align one’s portfolio with their short and long term goals keeping in mind the market trends.
Now let's see the ways to manage finances effectively:
1. Have a bank account first and then try to reduce its number to one:
Jan Dhan Yojana - the biggest financial inclusion drive of the country made it possible for the majority of the families to have at least one bank account. However, there is still a section of the population having no bank account and still dependent on old means of saving money in their home locker. Another side of the coin reveals people with more than 2 bank accounts which makes it difficult for them to manage their finances. Often working class people have their salaries deposited in their bank account which usually is different from the existing account they had. This can also lead to mismanagement of finance. People are advised to have at most 2 bank accounts - one savings and one checking or current account.
2. Automate most of your payments:
Most of your bill payments can be auto-debited from your account which saves the
expenses and time of depositing it in person. If the bills are automated each month
there will no problem concerning late fines which usually hampers your earning and
goodwill. Even your credit card payment can be automated each month.
3. Have a budget for your spending:
Many people don’t budget because they don’t want to go through the tedious process of
bracketing their expenses and adding mind-boggling numbers. Most people use their
inefficiencies in dealing with their numbers as an excuse for budgeting which shouldn’t
be the case. All it requires is a few hours of your time every month. Instead of focusing
on the process of creating a budget, one should focus on the value that budgeting will
bring to their life. You can employ the tool of MS Excel to effectively track your spending.
4. Curtail your Unaccounted Spending:
An essential part of your budget is the net amount of money left after you have subtracted your expenses from your income. If you have any money left over, you can use it further investment or other activities. It's natural for people to not take into account the money spent on trivial affairs like popcorn in a cinema hall or the daily parking charges. If these nitty expenses are accumulated, it might show as a substantial part of your budget in the Excel. Therefore, one should be prudent while making such expenditures.
5. Contribute to Savings Regularly:
Depositing some money into a savings account regularly can help you build sound
financial habits. You can even set it up, so the money is automatically transferred from
your checking account to your savings account. That way, you don’t have to remember to
make the transfer. But do ensure that you don’t keep much money in your savings account
as it does not promise a handsome return. Instead, diversify your investments into schemes
and policies which offer a better return, although unconventional.
6. Use credit card wisely :
Credit cards might turn out to be the worst enemy, especially if you are a spendthrift. When
you run short of cash, you simply rely on credit cards to pay for you without considering
your ability to pay the balance on due time. These balances incur huge interest and
therefore should be restricted to the minimum. Control your urge to splurge your money on
things you don’t necessarily need.
7. Create an emergency fund :
Establish your own emergency fund to be used only in the face of some contingency. Most
of the time, it happens that people have to withdraw from their savings account or break
their fixed deposit when faced with adversity. You shouldn’t touch this fund under normal
circumstances and let it earn interest unless you are met with an unforeseen adverse situation.
8. Do not hesitate in investing in mutual funds after properly analysing the risk:
Investing in mutual funds is a lot easier than investing in shares where you have
professional money managers operating it who allocate the fund’s assets and attempt to
produce income for the funds’ investors. However, unlike stocks, mutual funds investors do
not get voting rights. Before investing in mutual funds, you must be sure that you do not
require the invested money for a long time. Don’t use your emergency funds towards
investing in mutual funds. You can pay the investment amount either in lump sum or
through Systematic Investment Plan (SIP), whichever is feasible. You can deposit in
mutual funds for every goal, be it short term or long term. One can also invest in equity
linked saving scheme which gives tax benefits and has a lock-in period of three years, post
which the amount can be withdrawn or invested in other funds.
9. Consider taking advice from a financial planner:
Sometimes managing finance can seem like a complicated job. In such cases, a person
should take the help of various finance planning applications readily available or
even consider financial advisors to sought help. This might incur some expenses initially
but can resolve your financial problems in the long run. With these applications, one can
have all information in order to make smarter decisions and achieve long term goals.
10. Start saving for life post-retirement at an early age:
There is a golden adage: ‘The sooner you start saving for retirement, the better off you
will be in your golden year’. Keeping this in mind, you should start saving as early as
possible. You need to first set your savings target- one that tells you how much you need
to set aside over time to meet the retirement goal that will allow living a life you
envisioned. If you start early, you can just set aside 10% of your savings towards
retirement scheme and still make it a substantial amount. That’s where you get an early
Now that you know the easy tricks to better manage your finances, you surely won’t commit the mistake done by Sameer. He was naive and did not take into account inflation while saving. It’s pertinent to understand that a 3% return in an economy marred by a 4% inflation is actually a 1% loss in the value of money. Therefore, what’s important is a better investment of savings in a diversified portfolio. 100% investment in equity can leave you bankrupt in the face of losses. Similarly, 100% investment in debt will hamper the potential of your wealth to boom. One must have a mix of both in varied ratios depending on their age and goals.
These little tips will help you in better managing your money and converting all your goals and dreams into a blissful reality.
By Abhishek Agarwal