It is the most sought after thing in the universe and yet, when it comes to managing the personal money, very few of us are good at it. Everybody wants to earn more money but even before we earn it, money makes a way out through expenditures, and mostly, we are left with a very little surplus. And if ever we are left with the decent amount of surplus then very few of us know what to do with it. I myself am not good at money management but I have learnt few lessons – academically or practically- and here I share them:
1. A dollar today is worth than a dollar tomorrow– This is the most fundamental principle to understand. Because of the inflation and the uncertainty, the value of 1 dollar today is more than what it will be tomorrow. Compare today’s income with at least the inflation adjusted income of tomorrow. Plan your purchases and savings accordingly.
2.Write down your financial goals– Very important to be clear with why do you want money, and you can then seek help of experts on how to achieve your goals. You can further divide your goals in to short term and long term.
3. Account for income only when the money reaches your safe, but count the expenditure the moment you owe someone money: You should count your money, only when it is in your control. However, expenditures should be counted the moment you owe money to someone, even if you are going to pay him tomorrow. Planning your finances using this simple principle will always help you to remain afloat and ensure liquidity.
4. Save some amount for the contingency and then spend: Make way for the savings first. Some percent of your income (10- 30%) should go into the savings – insurance, MF, Gold, FD etc. However, Do not keep on saving at the cost of today. Living a good life today is as important. Good life although is a relative term but you should spend at least some amount on the hygiene factors – Good Health, Good Food and Decent clothes. Yes, even today, cars and mobile phones should come much later.
5. Your one of the first investment should be a term insurance plan: Should I call it an investment? Term Insurance plan is the plan which cover only your life and you do not get any money if you survive the cover period (Well no body wants this money :-P). And if, God forbid, something happens to you, your family gets the money. Term Insurance is the actual insurance plan. If your aim is to secure your family, this is the plan to buy. It is cheap too. Please do not mix and confuse insurance with investment.
6. Do not invest money in the stock market by taking tips from the TV experts: This is the worst way of investing money in the stock market. Realise this, that people who make money in the market, do so because they have better knowledge or more information than the others. When the expert comes and speaks on TV, he is virtually making everyone aware about that knowledge. The actual money in the stock market is made much before the tip is released to the normal people. Making money in the stock market requires good understanding of the market.
7. Invest in Mutual Funds through SIP: If you want to invest in stock market then enter through Mutual Funds. SIP (systematic investment plan) is a way to invest money in parts, on the fixed days of the months to avoid the downside in the market. In SIP, things average out in the long run and so it is less risky for a person who has no financial background.
8. In any loan, you pay more interest in the beginning: Yes, that is the way the banks design their loans. Of course you pay equal EMI’s every month but the EMI is designed in such a manner that the banks earn the interest part in the first few years and gradually over the years they take back the principal part (The maths behind this logic is beyond the scope of explanation for this blog, you can ask any expert). So, it is better to pay off the loan as quickly as possible because paying it during the last few years of the tenure is not as advantageous for you. This is truer in the case of home loans.
9. Invest in the assets which will not depreciate: Cars and gadgets are very important but the problem is that there value decreases over the period of time and with the usage. So, any purchase you are doing of such items is not an investment, but it is an expenditure. Investment is buying Gold or any such asset, which will gain value in future.
10. Avoid Using Credit Cards: Use credit cards only when there is no other option left. Then you will be in full command of your personal finances. If you keep on spending by using your credit card, after 5 days you will lose track of your expenditures because you have not paid for them so far. Also, remember that penalty charges for the late payment are very high in the case of credit cards.