Everyone has the ability to manage their finances on their own.
Its better that one should manage his/her own money and finances as no one cares about your money more than you do.
To manage your own money proper financial planning needed. You just need to have an understanding in the following areas:
Simple steps to manage your personal finance
1. Buy term-insurance
Term insurance is important if you are the only earning member of your family and you have dependants to look after.
The best thing about term insurance is that it’s very less expensive than other insurance plans. Suppose a person of 23 years of age wants to make an investment cover worth Rs 67,50,000, so he need to pay an annual premium of approximately Rs 7000 (provided the person is not a tobacco user), which comes to a Rs 19/day.
2. Maintain an Emergency fund
Everybody should have an emergency fund for themselves as nobody has control over the future. Ideally this fund should comprise of around 6-9 months of your monthly household expenses.
Say if your monthly household expenses come to Rs 15000, so you should save a minimum of Rs 90,000 as an emergency fund. Try to use this fund only in case of an emergency like job loss, major illness etc. Keep the funds in an insured bank account so that they will be protected and easily available in case of need.
3. Buy mediclaim
Getting a medical insurance is a must for all family members since health issues doesn’t see any age. However, if you cannot afford to get every family member covered, then at least buy coverage for those members who are above 30 years of age. The earlier you start, the lesser will be the premium.
4. Retirement Planning
Retirement planning refers to the allocation of retirement savings. The ultimate goal of retirement planning is to achieve financial independence.
The earlier you start, the lesser problems you have to face post retirement. As soon as you get a job, start with your retirement planning.
Let’s take an example to understand that how much you should save for your retirement in order to fulfil your retirement goal. Suppose your present age is 30 years and you are planning to retire at the age of 60. Your average monthly income stands at Rs 30000 and you plan to build a retirement corpus of Rs 50 lacs.
Say you are planning to invest Rs 5000 every month and its fetches an interest of 6.5% (current FD rate) p.a. After 30 years, your money will grow more than 55 lacs.
However, instead of investing the entire Rs 5000 in fixed income securities, invest Rs 3000 in fixed income which fetches around 6.5% and remaining Rs 2000 in equity (assuming it will earn 12% p.a.).
This process will build you a corpus of whooping Rs 1 crore. It’s always advisable that instead of investing your total fund in fixed income security, diversify it among different asset class. You can take the help of compounding calculator to plan out your retirement goal.
Also Read: Why is Retirement Planning Important?
5. Create a will
A will is a document which states that who will inherit your real estate, bank account and other property after you are no more. It’s not that difficult as it seems and it just takes few days to prepare a will.
As parents, if you want to make sure that your child is cared for by the people you would choose if anything happen to you, then making a will is the single most important thing. If you don’t want your family to be in a state of fight or quarrel after you die, then you should write a will.
6. Invest your money wisely
Depending upon your risk appetite, choose a right investment class to invest your money as after all it’s your hard earned cash.
Maintain a well diversified portfolio to cut down your risk by investing in any particular asset class especially in equities which is considered to be highly risky. If you are not capable to invest your money, always seek the guidance of a financial planner or expert.
Investing in equities is a better option if you are planning to invest for a longer term say 10 years or more. Power of compounding works very well for long term investments and it is believed to be “Eighth wonder of the world” by the famous scientist, Albert Einstein.
7. Estate planning is important
It is a process which involves few people including your family, other individuals and in some cases, charitable institution of person’s choice. It involves deciding upon the title holder of your assets in case of your disability or death. Moreover, it also addresses the future needs if you’re not able to take proper care of yours.
In very simple words, estate planning refers to making a pre plan and naming the people whom you want the things to receive after your death.
An advocate or a lawyer may help you in planning your estate and also advise on issues like asset title, taxes and the estate management.
We would suggest everybody to read books on personal finance so that you acquire at least basic understanding of finance. You can read books like “Personal Finance for Dummies” or “The Richest Man in Babylon” to start with.
You can also go through some free courses so as to increase and update your knowledge to become your own financial planner.
However there will always be few areas like tax planning where you would need the help of financial planner or some professional help.
But make sure that you understand what you are being offered, do your research and ask questions to understand it properly.