We all know that personal finance is a step-by-step process to grow your money smartly and wisely for a comfortable future. It can be like a fitness journey, it requires discipline, consistency, and long-term commitment to see meaningful results.
It is mainly built on four pillars: Budgeting, Saving, Investing, and Debt Management.
Let’s break down each pillar in detail and show you how to apply it practically, clearly, and effectively.
Budgeting
The very first pillar of personal or any other finance is to make a budget of your expenses in detail, because it helps you manage your money wisely. By budgeting, you can tell where your money goes, avoid overspending, and make sure you have enough money for essentials like rent, food, fuel, and utility bills.
It also helps in saving money for specific goals like travel, buying something special, and most importantly, saving money for emergencies. In short, budgeting takes control of your cash flow.
Why Does it Matter?
- Because of the rise in inflation, the cost of living is also rising day by day, which means that now you have to spend more money on basic things like food, rent, bills, transportation, and healthcare and they can be expensive.
- Spending money on special occasions like weddings, festivals, and family functions. On these occasions, you have to buy clothes, gifts, food, and sometimes even travel, which is why it becomes really important to do the budgeting.
- With the increasing trend of using credit cards, it is really important to do budgeting. Because with the help of a credit card, you have full access to spending money on anything you want and you have to pay later, which can be really important to do the budget and manage your money according to your needs only.
How to Budget Effectively?
- To improve your personal finances, the first thing you need to do is track all your income, which includes, your salary after tax deduction, income from freelance, rental income, or any other extra income. This helps you understand how much you really have.
- Now, make a detailed list of your monthly expenses, like how much you spend on essential things like rent, transportation, utility bills, food, and insurance. So that you know how much you are spending on important things.
- Use simple ratio techniques for your spending. For example, 50% of your income is essential needs, 30% on savings and investments, and 20% on entertainment and shopping.
- Note down your expenses on a sheet or simply use app like Walnut, Money View, or even Excel Sheet.
Saving
The second pillar of personal finance is saving, which means keeping some percentage of your total income in your savings account, so that you can save that money in case of emergency or urgent need.
It is even better if you automate your savings, which means setting up your bank account to automatically transfer some fixed amount of money every month.
Why Is Saving Critical?
- Saving becomes extremely critical in case of emergencies like, sudden medical problems, job loss, urgent car or home repairs, or any other sudden expenses you didn’t expect and if you don’t have money during that time, then you might have to borrow money from someone else and which leads you to debt.
- As inflation is rising, it is important to save money and invest that money into buying stocks of top companies, mutual funds, and gold etc.,
By investing your savings in the right platform, your money can grow easily over time through investment and high returns, and you won’t have to work extra for it.
Where to Save?
- Try to keep at least 3-6 months of your expenses in a high-interest savings account, which will be your Emergency Fund, so you can have quick access to money during emergencies like medical issues, job loss, sudden repairs in your household etc.,
- Save your money according to the short-term goals, by using Recurring Deposit (RDs) and Fixed Deposit (FDs), as they are safe options that help your money grow with a fixed return without any risk.
- By using a tax-free option like Public Provident Fund (PPF) for long-term saving, you can get a safe return, which helps you build a big amount over time.
Some other strategies to save money are by setting up automation into the savings account, using a separate bank account for emergency funds, and by avoiding keeping too much cash in hand.
Investing
It simply means putting your money into things like stock, mutual funds, gold, or real estate so that it can grow over time and return even more money. Because just saving money isn’t enough for your finances.
Why Do You Need to Invest?
- Investing in Fixed Deposits (FDs) and Recurring Deposits (RDs) is not enough to beat the rising rate of inflation.
- Instead of that, investing in the share market and mutual funds offers much higher long-term returns because your money grows according to the success of the companies from which you bought the stocks.
- You need to invest your savings in Pension Plans to live comfortably and stress-free after retirement and to achieve that you need to start saving and investing money for retirement from your 30s
Best Investment Options
- Mutual Funds are one of the best investment options because they let you invest your money in many companies at once. You can even start with a small amount, and the best part is that a professional manager takes care of where to invest your money.
- When you buy a stock of a company, it means that now you own a small piece of that company, and if the company starts to grow in the future and makes a profit, the value of your stock also increases and helps you to earn money over time.
- National Pension Scheme (NPS) is a government-backed scheme where you invest regularly to build a retirement fund, and your money grows over time safely.
- Real Estate is a long-term investment, but it needs a lot of money, takes time to sell, and comes with extra costs like maintenance, taxes, and paperwork.
To invest safely in personal finance, you need to start early and stay consistent, even if you’re investing a small amount. Also, you need to understand the risks while investing. You don’t have to invest in something you don’t get.
Debt Management
Debt Management in personal finance is considered one of the most difficult tasks to handle. It means handling the money you borrow in the form of loans or credit card bills, and if you don’t pay them back on time, you may have to pay high interest, late fees, and your credit score and go down, making it harder to get loans in the future.
How to Manage Debt Wisely?
- Track your loan wisely by using apps like CRED or OneScore to stay updated with the due date and your credit score.
- Avoid minimum payments, especially on credit cards because they may seem easy, but the remaining amount keeps adding interest, and you end up paying much next time.
- Use the Snowball or Avalanche concept, which means paying off the smallest debt first and paying off the highest interest debt first respectively.
- By limiting the Equated Monthly Installment (EMIs), you can easily manage debt wisely. Make sure that total EMIs do not exceed 20-30% of your total monthly income.
Good vs Bad Debt
- Good Debt: Education loan, home loan, and business loan are usually considered as good debt, because they’re an investment that can benefit you in the future.
- Bad Debt: Credit card debt and personal loans for shopping and travel are considered bad debt because they often carry high interest rates and lose value over time, as they don’t earn money in the future.
Conclusion
Hence, the four pillars of personal finance include a budget, which ensures you have money left to save. Saving, which protects you from falling into some debt in future. Investment, which helps you grow money if you face inflation or a tight budget in future. Smart debt management, which ensures your earnings are not wasted on interest.
All these personal finance pillars can be achieved by staying consistent and making them a habit. Start today, and over time, you’ll see positive results in your savings, investments, and overall financial growth.
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