Personal Finance as a subject has not got its due importance in India in the past. Primarily because wealth was concentrated in the hands of few, and there was a lack of investment options hence wealth was largely channeled towards real estate. This led to the matter of personal finance limited to household budgeting and it never gained prominence as a tool for wealth creation.
However, the last couple of decades of globalization, the evolution of financial markets, and the penetration of the internet through smartphones have completely changed the landscape. While this brings more options to us, it also adds to the complexities of financial planning.
Given below are 7 basic principles of personal finance that one must keep in mind for a secure financial future
1. You are Going to Die Earlier than you Think
While our life expectancy has grown by 4 years during the last decade to 68 years, so did sudden deaths. As per the life expectancy report, coronary heart disease, lung disease, and stroke cause around 35% of the total deaths. Act before it catches
- Plan your Will (this will help smooth the transition of wealth to the intended nominee without legal hassles)
- Take adequate term life insurance (never mix insurance with investment, never buy endowment plans or ULIPs)
- Take adequate health insurance (Analyze exclusions and sub-limits properly, cheaper is not always the better)
- Assign a nominee/beneficiary to your investments and policies
- Share the details of your investments with your spouse / trusted person
2. Know the Invisible Thieves
Inflation and taxes steal a significant amount of your money – plan for them.
Consumer Price Index, s measure of inflation that directly affects us, averaged around 10% historically and came down only after 2013. It means Rs. 1 lakh that you have kept safely in your trunk will be worth just Rs. 38,554 in 10 years. Somebody has stolen 60% of your wealth.
After paying income tax to the government, you also pay taxes at the time of purchase of goods and services. Plan to save as much tax as you can. Invest in tax saving instruments wisely, but never
invest in saving tax. Equity Linked Saving Schemes (ELSS) are by far the best tax saving options, plan for staggered investments in advance.
3. Make Compounding Your Friend not Foe
Compounding has immense power, but it works both ways. If your loan is costing you more than the returns that you are generating from your investments then your priority should be to repay high-cost loans instead of continuing with investments. However, your low-cost loans like housing loans, education loans, and car loans can continue, provided you are investing in markets and expect much higher returns than the rate of interest of these loans. If you are planning to invest in Fixed Deposits, it’s better to first pay off these loans as well.
Positive leverage can accelerate your wealth creation and negative leverage can destroy your wealth faster than you can imagine.
4. Small Savings Don’t Hurt
The age-old idiom ‘Boond Boond se Ghada Bharta hai’ still holds good. An additional saving of Rs. 1000 per month, when invested in your portfolio, will result in more than Rs. 11 lakh corpus 20 years down the line. So take advantage of various offers. Some cool saving tricks that I use –
- Booking a restaurant table through the Dineout app: 15-20% discount + additional cashback on payment through the app.
- Planning my travel within India and booking everything myself: There are good start-ups in every link of the chain from car booking to hotel booking. An itinerary for every possible trip is also available online. Plan yourself and save a cool 30-40% of the travel cost
- I take the benefit of 5% cash back on fuel and utility payments through my StanC credit card and Rs. 10,000 cashback by my Amex credit card upon achieving 24000 points (they offer 1000 bonus points per month on certain purchases)
- Never pay interest, delayed penalties, or annual fees for credit cards. Automate bill payments to avoid delay penalty
- Explore every possible option to save tax (don’t evade it)
- Create your saving-focused budget and stick to
While saving money, try to find smart ways rather than compromising too much on day-to-day small luxuries. Make your wealth creation process joyful, not painful.
5. Invest for Freedom, not for Riches
Remember, after a certain amount of wealth it doesn’t matter how many zeros are there on the right side of your bank balance. So the target is to achieve financial freedom. List down all your life goals and the funds 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 invest 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.
6. Learn the Basics of Personal Finance
Confidence comes from knowledge. Confidence without knowledge is a path to destruction and knowledge without confidence is of no use. Learn basic math behind compounded interest, time value of money, return on investment, equity, and debt, and market behavior in the short, medium, and long term. The confidence derived from this knowledge will help you remain calm and focused in times of market underperformance and will also help in making the right decisions with your money.
7. Invest in Educating yourself, it has Maximum ROI
Do not think twice before buying that you thought had something useful in it. Do not hesitate to subscribe to paid courses in the area of your interest. Take a break from your job to pursue higher education. The return on such investment remains with you And finally, do not lose touch with humanity in your pursuit of financial freedom. Make friends, spread happiness, and go on vacations. After all, these are things worth pursuing.
