Before going into any further discussion on how to do you own financial planning, we shall understand the meaning of the term “Personal Finance”.
So what is Personal Finance?
Personal Finance is a very comprehensive term that covers managing all of your money including savings and investments too. It comprises financial management of all the personal resources including budgeting, saving, investing, financial protection, tax planning and retirement planning. The planning could be on both the individual and family level.
Financial Planning is not at all an easy task one should be aware of all his investments and expenditures to plan his finances effectively. For effective planning of finance, the person must be financially literate so that he will be able to differentiate between good and bad advice and make smart decisions. Since its not an easy task to manage all of your funds, several financial budgeting apps may help you to put your day to day finances in the palm of your hand.
For example,
1. You Need a Budget – this app helps you track and adjust your spending so that you are in control of every penny that you spend
2. Mint – this app keeps a check on all your cash flows, budgets, credit cards, bills and investments all from one place indeed it automatically updates all the financial information and divides it into categories so you always know where you stand financially.
Why is Personal Finance important?
Personal Finance is very important in everyone’s life; it plays a great role in determining the direction. It helps in constructing a better future. You can plan your present in such a way that you can make your future secure and eliminate the risk and surprises that you may get in your life. This pandemic has taught all of us the great importance of financial planning in our lives.
Now, to do you financial planning you need to cover 5 major aspects:
1. Savings
As recommended by financial experts savings between 20-30% of one’s take-home salary shall be done. It could be invested in meeting various financial goals. When a person deems to manage his/her money, one of the most appropriate approaches is “saving”, “more you save, more you have”.
Never forget to park your funds for emergency needs. An emergency fund is mainly to cater for living expenses when income stops suddenly this thing we have been taught by this pandemic very well.
2. Investing
Investment starts only after savings so always invest some of your savings in purchasing valuable assets like a bond, mutual funds, stocks. Investment in mutual funds is considered as one of the best investment options. To invest your money effectively too with higher returns you need to analyse several factors such as risk, return, tenure, tax and liquidity. Investment requires great discipline and patience. You can invest for the long-term, medium-term and short-term and select the appropriate option as per your planning.
Best investment options for short term: Liquid Funds, Ultra short term funds
Best investment options for medium term: Hybrid funds, ELSS, Short Term Debt funds like Banking and PSU Debt Funds
Best investment options for long term: Multi-cap funds, NPS , Large Cap Funds
3. Insurance
There are 3 kinds of insurance we all need. And these are:
Term insurance: It is a type of life insurance that ensures that your family or dependents do not have to go through financial crises if you die early. As compared to other health insurance products, the sum assured for term insurance is higher than the premium amount.
Health insurance and Critical Illness insurance: Health insurance covers all costs for treatment of the insured like hospitalisation, medication, pre and post hospitalisation expenses etc.You can opt for critical insurance along with your basic health policy. In case you are diagnosed with one of the critical illnesses mentioned in your policy, the insurance company will pay you the sum assured.
Mortgage Protection insurance: If you die during the term of mortgage, then mortgage protection insurance clears off your mortgage; the loan or mortgage for home, car, property etc. does not become an obligation for your family, in case you die early.
4. Tax Savings
One of the main aspects of personal finance is tax savings. There are almost 60-70 exemptions and deductions through which you can bring down your taxable income. The 2 most popular deductions for taking tax-saving benefits are 80(C) and 80(D).
5. Retirement planning
Retirement is one of the most crucial stages of life, especially for private-sector employees. They are required to plan their post-retirement life very smartly so that they will never fall short of assets.