Financial independence is something that every girl wishes to achieve on her own. However, it is essential that you know how to manage your personal finance, as it can help secure you secure your future and act as a buffer in cases of an emergency.
There are so many investment opportunities and it may seem like a daunting task to select between SIPs, mutual funds, and deposit accounts. Most people tend to underestimate the importance of personal finance which ultimately leads to financial insecurity and instability.
This post will take you through everything a girl must know about personal finance.
What Is Personal Finance?
Personal finance is managing one’s finances, which include creating a budget, investment, saving, evaluation of financial risk and saving for future life events.
The key to successful personal finance is to ensure sustainability through banking products like credit cards, debit cards, checking accounts regularly and having an insurance like health and life insurance.
In order to keep track of one’s personal finance, it is essential to create a financial plan. Well, sticking to a financial plan may be difficult in the beginning, but in time, one will be able to stick to the plan and derive all the benefits from these plans.
How to Make a Financial Plan?
The first step in managing one’s personal finance is to create a financial plan. The various steps in the process are:
- +Evaluating your financial position
- +Creating a budget
- +Apply the 50/20/30 rule
- +Prioritize your saving
- + Making smart investment choices
- +Making a realistic retirement plan
- +Try saving tax
- +Protecting your credit score
Each of these points has been explained in the following sections.
1. Evaluating your Financial Position
In order to financial goals in place, it is important to evaluate one’s financial position. It isn’t as difficult as it may sound, rest be assured.
All you need to do is list out all your personal resources and elements of the cash flow to estimate your net worth. Once you calculate your net worth, subtract the liabilities that include expenses.
This analysis will help you in the next step, where you need to create a budget that is the key to managing one’s personal finances.
2. Creating a budget
Another common misconception that most people have is that sticking to a budget means that you can no longer afford a pair of expensive shoe or a vacation. The art of creating a budget helps you save, invest, and set aside money for a rainy day.
A budget is nothing but a written plan on how you plan to spend money for a particular month. It is important that one keeps an eye on their spending habit and they make a note of all the purchases made.
3. Apply the 50/20/30 Rule
The 50/20/30 rule is simple, yet effective. The breakup refers to:
- +Essential costs must be allotted: 50%
- +Financial goals must be allotted :20%
- +Lifestyle costs must be allotted :30%
Essential costs include a home loan or rent payment, transportation costs, car payments and any other essential payment that one is required to pay. It also includes the minimum amount that needs to be paid towards credit card bills.
The amount of money earmarked for financial goals helps you build a secure financial future that include investments in mutual funds, SIPs and retirement plans. You should always aim to save bonus amounts in this fund to reach your financial goal.
4. Prioritize Your Saving
Once the budget has been created, you might feel as though you are saving a lot. The key to saving is not to place all your eggs in a single basket and invest your hard earned money in different ways so that you are able to grow your money.
While saving, the most important thing that one should consider is setting aside a rainy day fund, or an emergency fund. The extra money that you save can come in handy in case you fall ill or sustain an injury.
Before spending your yearly bonus on something extravagant, consider saving a part of the amount in this fund, as it will help you in the long run.
5. Making Smart Investment Choices
Given the fact that you may not receive a sizable salary increment each year, it should not stop you from finding ways to make smart investment choices. Making smart investment choices can help grow your money, that you can then use for your rainy day find, insurance, and retirement plan.
The best way to grow your money is to invest in a diverse investment portfolio. Keep an eye out for well performing mutual finds that assure good returns and invest in them to grow your wealth.
6. Making a Realistic Retirement Plan
In addition to the rainy day fund, you should consider investing in a well-thought-out retirement plan that is realistic. In your early 20s and 30s, the most productive years of your life, you must be inclined to make the most of your money, because it is the perfect time to save.
You must explore the various retirement schemes available and select a plan that suits your needs. Consider investing in the employee fund offered by most employers as it is a systematic saving scheme that can help you in the long run.
7. Try Saving Tax
People often end up paying more on their taxes than they ought to, since they are not sure about the provisions that are applicable on them. However, some of the ways in which one can save taxes include:
- +House rent allowance
- +Tax saving insurance
- +Tax saving investments
If you regularly make donations to a registered animal shelter or NGO, then you can receive a tax deduction under Section 80G. Similarly, you can save on taxes by investing in insurance.
In addition to that, loans, allowances, and house rent allowance are also areas where one can save on taxes. If you are not sure about how you can save on your tax, it will be worthwhile to hire a certified charted accountant to help you.
As medical expenses keep going up each day, it is important to invest in life and health insurance. Always remember to take a scheme that covers all your needs and think of this as an investment.
Moreover, insurance helps reduce the risk that you face and acts as a buffer in case of prolonged illness, disability, and liability. Investing in insurance has monetary benefits as you can avail for a tax break as well.
Additionally, remember to pay the premium on time to continue enjoying the benefits extended by the insurance plan.
9. Protecting Your Credit Score
Buying a home or a car is not an impossible task for anyone, but it is not easy either. For this reason, you should protect your credit score since it can help you get a loan to buy a car or home.
The best way to maintain a good credit score is to repay your student loans and credit card debt as soon as you can. Otherwise, the amount will keep spiraling out of control and it can ruin your credit score.
10. Being in Control of Yourself
In order to stick to your plan, you need to exercise self-control. Yes, you heard it right!
It is one of the most difficult things to do, but given the odds, it’s always better to save for a rainy day rather than live to regret your spending choice later. But if you feel that someone else can manage your money for you, it’s not a wise idea.
Make an earnest effort to stick to your budget and reward yourself for doing so. And always remember that giving into temptation once would weaken your resolve from splurging again.
Tips to Save Money
Well, most of your life’s problems are related to money, or the lack of it. Once you have your finance sorted, most of the problems you face will disappear.
Some of the aspects that you should keep in mind to improve your financial situation include:
- +Stick to financial goals
- +Spend lesser than you earn
- +Learning from your monetary mistakes
Each of these points has been discussed in the following sections.
1. Stick to Financial Goals
Now that you know how you can create financial goals, in the form of a budget, you need to stick to them. It might be hard in the beginning but you will learn to love the feeling of seeing your bank balance grow each month.
2. Spend Lesser than You Earn
As long as you stick to the 50/20/30 formula you are good to go and always remember to spend lesser than you earn. To a large extent, managing your personal finances is about exercising self-control.
Saving and investing becomes a habit over time, which you must try to inculcate towards a better future. A few years down the line, you will understand the financial implications of resisting temptation and securing your future.
3. Learning from Your Monetary Mistakes
Everyone makes monetary mistakes, but you should be clever not to make the same mistake twice. You must make yourself more cautious about money management.
These are the few insights on how girls must know about personal finance and secure their future. So, if you haven’t set financial goals yet, this is the perfect time to start doing so.
Disclaimer: the views expressed here are those of the author. Mutual funds are subject to market risks. Please read the offer document before investing.