Personal Finance Made Easy
By: Himanshu Purohit
Tags: Personal Finance, Investing, Finance, Financial Planning, Budgeting

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In 1737, Benjamin Franklin the founding father of United States wrote in his column “a penny saved is two pence clear” which we now know as “a penny saved is a penny earned.” Over the centuries the face of the earth has changed whereas Benjamin Franklin’s financial advice is still intact in modern times and we put such advice in the category of “personal finance”.

In simple words, personal finance is managing your money wisely to achieve your short-term or long-term financial goals.

Personal finance is very important and you don’t need a million-dollar or high profile financial planner to kick start your journey.

Let us understand personal finance through my friend Adam’s life.

Adam is a 24-year-old middle-class professional who lives in Chailand and earns 20,000 Chai/month (Currency = Chai)

Adam currently lives on rent and has a goal to buy a house. So, how can he achieve his goal without getting lost in the jungle of financial advice?

) Budgeting: Whether you like is or not budgeting is the starting point of any financial planning process, you need to face the evil (expenses) to achieve your desired goal.

How should Adam go about making a Budget? It’s simple — open excel!

Now we know out of 20,000 Adam spends 19,000 and is now left with 1,000.

( It vital to be honest while preparing a budget don’t write miscellaneous to get away from the evil)

Adam thinks 1,000 Chai is a good amount to start his financial planning with, but can he do better? Absolutely, budgeting is not just noting down your expenses but an opportunity to scrutinize areas where you are throwing your money down the drain.

So, let’s see where can Adam cut down his unproductive expenditures — impulse buying, eating out, entertainment, weekend parties and credit card bills. Interest on education loan is also an expenditure but getting rid of loans as soon as possible is the best thing. Expenses like rent, food and sending money to retired parents is a necessity.

( Cutting down doesn’t mean to put yourself in handcuffs rather restraining yourself from overspending )

Keeping everything in mind Adam further cuts down 1,500 Chai from his expenditure and now has a total saving of 3,000 Chai (Amazing!)

2.) Getting rid of debt: That’s right debt is your worst enemy and you should get rid/ limit it as soon as possible because every month your hard-earned money slips out of your pocket.

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Adam should get rid of education loan and maybe throw away his credit card (only planned investments should be made with credit card otherwise restrain from using it because it eats up interest and if you miss your payment then god help you).

Adam has now created a budget and is free from debt. What should he do next?

3.) Emergency Fund: Establishing an emergency fund is a prerequisite to investing. You should have readily available cash to act as a cushion in an emergency such as accidents, natural disasters, illness, job loss etc. (what else is a better teacher than covid-19?)

credit : debtrelief

Adam has a stable job that’s why he plans have four months worth of living expenses in an emergency fund. (The investment can vary according to your job profile or preferences. If your job is unstable than anywhere between 6–8 months is ideal.)

4.) Investing:

Now comes the final and the most crucial stage of investing your savings. Before investing you need to figure out your investment structure and your risk appetite .i.e ask yourself How should I distribute my savings? How much risk can I take? What is my ultimate financial goal/goals? If you have proper answers to these questions then you are on your way to attaining nirvana :). If you are a first-time investor then for starters you can invest in mutual funds or index funds because the cost of managing is much lesser than a personalized portfolio. (We assume less cost means less return whereas that’s not the case. Historically, Index funds have shown better returns than stocks) and as you gain more knowledge and experience you can start diversifying your portfolio with stocks, bonds, commodities etc.

(It is always better to invest long-term than focusing on short-term gains.)

Adam asked himself the above questions and came up with the following answers:-

a.) Adam wants to invest in an index fund and distribute the remaining amount in stocks.

b.) Adam is young so he can take risks .i.e his risk appetite is high and will steadily increase the overall percentage of stocks in his portfolio to an optimal level.

c.) Current Financial goal is to buy a house.

So, after rigorous planning and researching Adam finally decided to have a portfolio with 60% stocks and 40% bonds according to his goals and risk appetite.

That’s it and you are well on your way to achieve your goals like Adam. But always take time out to do your independent research and never fall for any quick money scheme.