Meet 30 year old Subhash. He has a stable job, he earns a decent amount every month and he knows how to manage that money. His father recently retired from the same company after more than 40 years. Now in his 60s, Subhash’s father only wishes for one thing. He always wanted to have a car. But he could not save enough for this big purchase.
His per month income was around ₹50,000 and the monthly household expenditure was up to ₹40,000. Subhash’s father managed to meet the needs and requirements of his family. But he could never fulfill his expensive wish. Knowing this, Subhash recently decided to surprise his father. As a retirement gift, he gave his father the car that his father had always wanted.
Both were equally puzzled, Subhash’s father had only one question. Perhaps you will also have the same question.
How did Subhash manage to make such a purchase at the age of 30 when Subhash’s father didn’t take the risk of getting it in a career of 40 years?
The answer is clear. Subhash’s father only saved his money, meanwhile Subhash invested it. Saving only helps in keeping the capital safe. But investment helps in increasing it. And this is where personal finance comes in handy. It is more than just earning, spending and saving. It helps you create and follow a financial plan based on your personal life goals.
In this module, we will learn about all the important things related to personal finance. And learn how financial planning can help your money grow. Let us answer some important questions like what is personal finance and why is personal finance important.
What is personal finance?
In simple words, personal finance is the art of managing your finances effectively. This includes budgeting, financial planning, saving, spending wisely and most importantly, investing smartly. At first glance it seems very simple to us, doesn’t it? But when you dig deeper, you’ll see that personal finance isn’t something you’ll learn overnight. Cultivating good personal finance habits takes commitment, dedication and hard work.
At an individual level, personal finance ensures that your money is spent and invested in the best possible way. But to reach that stage, you need to be aware of the many elements involved in personal finance. It is more than just spending and saving. Let us take the case of Subhash’s father from our first example. He certainly managed to save enough for his family’s needs. But is this enough?
Obviously not. As Subhash’s example shows, personal finance is more than just saving an amount after you meet your monthly expenses. It is these additional aspects that we will look at extensively in this module. These include assessing your goals, measuring your investment risk appetite and your expectations for the future.
Before we get to that stage, let’s look at an important question, why is personal finance important? Why is this important to people like you?
Why is personal finance important?
The need for personal finance is multifaceted. Personal finance offers a variety of benefits depending on the individual. For some, it makes money management easier, for others it helps in improving their investments and financial planning. Let us take a look at the broad reasons behind why personal finance is so important.
It helps you understand your finances better
When you begin to understand your finances better, you begin to take control of your money. You need to find answers to a few basic questions:
What is your monthly budget?
How much of your money do you spend on luxury products and services?
And how much do you spend on things you need?
What are your future requirements?
For personal finance, you have to know about some such things. And by doing so, you will be able to better understand how much you earn, spend and save. And this helps you understand your finances better. It lays the foundation for the financial planning you will do in the future.
It enables you to plan your investments
When you take care of your finances, investment planning becomes easier. Subhash from our previous example is the best role model for this. Ever since he earned his first paycheck at the age of 24, he has been consistently investing his money. This was possible only because he had done some financial planning which streamlined his investments. With clear short and long term goals, you can invest smartly through personal finance.
It prevents you from taking excessive loans
The EMI option can be very tempting as it promotes the ‘buy now and pay later’ approach. Often these loans are easily manageable, especially when you have a good steady, steady income. However, some people take huge loans which become impossible to repay. And the burden of debt is a huge burden to bear.
But when you manage your finances, you stay away from debts that you may not be able to repay. This is one of the biggest advantages of doing financial planning and tracking your personal finance.
It helps in increasing your wealth and property
Personal finance takes you a step further than saving for your needs. It helps you grow your money manifold by helping you choose the right investment option. In other words, personal finance is essential as it helps you build wealth, so that your future is financially secure. With the right financial planning, you can retire comfortably and fulfill your dreams and goals in the future.