Personal Finance

Fundamentals of Personal Financial Planning

Personal finance covers a wide variety of fundamental topics including budget, expense, debt, saving, retirement and insurance. Awareness towards how each of these topics works together and affect each other is important. It may be the root work for a solid financial foundation for you and your family.

Budget

At the basic level of personal finance, you deals with a budget; you earns money and then you spend that money.

The problem that arises from not having a detailed budget is that we are faced with so many financial decisions it is nearly impossible to keep track of and remember everything.
When you are spending money on something you think about it and realize that by spending that money you will not be able to spend same money on something else. This lack of planing can lead to overspending, debt problems or even inability to adequately plan your future.

When you create a budget you are planning how much money you have, what you spend it on and how much, if any is left over.

Once you can see the ins and outs of your money you can optimize your spends so that necessary items are sure to be covered and make cut on wasteful spends, that will allow you to save money.

Reducing Waste of Money by Cutting Expenses

After you have created a budget you begins to see where expenses may be reduced in order to meet your goals.

This cut of expense may be eating out less, may be making cuts on outing, it may be regarding unnecessary usage of vehicle (Fuel Saving). Whatever the case may be, the ultimate outcome will be reduction in cost cutting in routine life. Which will increase one’s saving ability.

Getting Out of Debt

You may  find yourself with deferred debt to get rid of even After creating a sound budget and cutting unnecessary expenses. Taking on debt by itself isn’t necessarily a bad thing but there are two kinds of debt: good debt and bad debt.

When you go to the Shopping and have yourself a shopping spree using your credit card with a 30% annual interest rate is bad debt. But to purchase a home you are taking a lot of debt, with lower interest rates and the purchase of an asset that can increase in value is an acceptable form of debt. Its called good debt

When you find yourself in debt it is beneficiary to pay more than the minimum monthly payment. Payment of minimum in each month will take decades to repay the debt. For that you should start paying more than the minimum then you can take benefits of lower interest rate. High interest rates will make more difficult to getting out from under the debt.

Saving with Retirement Planing

Start your retirement planing from today. Don’t waste time by thinking will start saving for retirement after some years.

The goal of this post is not to explain the mechanics of retirement plans. Rather, we want to show you the importance of saving earlier than later.

It all comes down to principle of compound interest. Its power of compounding.

Compound interest occurs when the interest that accrues to an amount of money in turn accrues interest itself. It’s the deceivingly simple force that causes wealth to rapidly snowball. This is why its the concept that is at the core of all finance.

Lets take an example consists of three people who experience the same annual return on their retirement funds:

  • Mahesh, invests 20,000 per year only from ages 25 to 35 (10 years)
  • Haresh, invests 20,000 per year, from ages 35 to 65 (30 years)
  • Hitesh, invests 20,000 per year, from ages 25 to 65 (40 years)

We can see that Hitesh would end up with the most money. But the amount he has saved is astronomically large than the amounts saved by Mahesh or Haresh.

Interestingly, Mahesh, who saved for just 10 years, has more wealth than Haresh, who saved for 30 years.

That discrepancy can be explained by compound interest.

All of the investment returns Mahesh earned in his 10 years of saving. It’s to the point that Haresh can’t catch up even if he saves for an additional 20 years.

Of course, if Mahesh saved like Hitesh. well if you haven’t noticed Hitesh’s savings is just the savings of Mahesh and Haresh combined.

Mahesh get the benefits of the incredible power of compound interest.

Insurance

You have generated wealth by hardworking for you and your family. Accidents, disabilities and Health issues can and do happen and if you aren’t adequately insured it could leave you in financial trouble.

Some insurance policies are required and everyone should have these types of coverage. There are many other types of insurance policies that are probably not needed and you could be wasting your money, which can be utilised in other work. One should understand the need of insurance and overdose of Insurance. How much insurance should one have has been explained in another post.  For detailed study Click here.

Comment: