Monday, August 8, 2022

Personal Finance Basics - Ultimate Guide

Personal Finance Basics

Personal finance is a term that includes various concepts like saving, managing money, investing, etc. Besides, the term covers banking, budgeting, mortgages, investments, insurance, retirement planning, and tax planning. You can say that it comprises the entire industry that can offer people financial services. In addition, it can recommend them about financial and investment chances.

In simple words, it is a personal finance management that a family unit does for saving, spending money, etc., taking different financial risks and future life events. If you want to plan it for yourself, you must consider the suitability to your needs. For example, you should consider banking products like checking, savings accounts, credit cards, and consumer loans. In addition, it is essential to consider companies' shares, bonds, mutual funds, and other investments in private equity along with the insurance, including life insurance, health insurance, & disability insurance. Moreover, you should consider social security advantages, retirement plans, income tax management, etc.

What is Personal Finance?

The Personal finance meaning is how to manage money, save and invest.

Principles of Personal Finance:

Remember that the circumstances have differences based on patterns of income, wealth, and consumption needs. Besides, different countries have different tax and financial laws. In addition, the market condition depends on geographic location. It indicates that advice for you may not be suitable for another person. In this case, you can take the help of a personal finance advisor. They can provide personalized advice in challenging situations. Moreover, if you are a person with high wealth, you should hire someone like him.

But there is an argument between University of Chicago professor Harold Pollack and personal finance writer Helaine Olen. They said that advice in the US can boil down to some easy steps.

  • You should pay the credit card balance off each month ultimately. 
  • In addition, you should save 20% of your income. 
  • Besides, you should make an emergency fund. 
  • Try to contribute more to tax-benefitted funds, including 401(k) retirement funds, individual retirement accounts, and 529 education savings plans.

While investing savings:

  • Ensure that you must not trade individual securities. 
  • Try to avoid high-fee managed funds. 
  • Remember that you have to find mutual funds of low cost. 
  • Whether you use a financial advisor, you need them to commit to a fiduciary duty to act in your best interest.

Personal Finance Planning Process:

Financial planning is a crucial component of personal finance. It is a dynamic procedure that you must monitor and re-evaluate daily. Usually, it involves five steps.


If you want to assess your financial situation, you have to compile easy versions of the financial statements like balance sheets and income statements. Using a personal balance sheet will provide you a list containing values of your assets like car, house, clothes, stocks, bank account, and cryptocurrencies. You can list private liabilities like credit card debt, bank loans, and mortgages. Remember that a personal income statement can list your income and expenses.

Goal Setting: 

You should always target many goals, even if it mix short- and long-term goals. For illustration, you may have a long-term goal like retiring at age 65 with a net worth of $1,000,000. On the flip side, a short-term goal is like saving up money for a new laptop or computer to buy in the upcoming month. When you set a goal, it will help you to make financial planning. You should set your goal to meet specific financial requirements.

Plan Creation: 

The plan asks you how you should accomplish your goals. It means you should decrease unnecessary expenses, enhance the employment income, spend money in the stock market, etc.


When you want to execute a plan, ensure that you must need discipline and perseverance. If necessary, you can take help from professionals like accountants, financial planners, investment advisers, and lawyers.

Monitoring and Re-Assessment: 

The plan should be monitored to adjust planning and reassess it. Goals that most adults have include:-

  • Pay off credit card/student loan/housing/car loan debt, 
  • Spend the money for retirement, 
  • Spend the money on child education 
  • Pay medical expenses.

Why Do You Need Personal Finance?

People will need it for different reasons, including:-

1. No Formal Education:

Most nations have a formal education across different disciplines. People pursue study to earn a livelihood. What they have learned will be available as an outcome in the form of money. Although we know making money is our primary motive, no formal education still exists at elementary levels like schools or colleges. Students don't learn how to manage money. But it is essential to know the gap in the education system that doesn't let us see how a person should manage their money. That's why we should learn personal finance from an early age to differentiate between needs vs. wants. According to this, you should plan accurately.

2. Shortened Employable Age:

It has been years since people notice the need for change, the jobs which need manual intervention or are mechanical. But these are becoming redundant very quickly.

Many employment chances shift from nations with higher labor costs to countries with lower labor costs. It happens several times when employees who don't have enough skills in the middle management category are replaced by fresh talents. The reason is that the upcoming talents know new modern technologies to fix problems. As a result, they become more useful for companies than the old ones. Besides, the company can also hire them at low prices, and they are also valuable to the company.

Economy health of any nation drives automobiles, chemicals, construction, consumption, and demand. We have seen that if economies stagnate, some industries suffer more than others. It can result in companies that rationalize the workforce. You may lose your job and become unemployed for a considerable time. These are reasons why the legal employable age of 60 is decreasing.

That's why you should begin planning for your retirement and save money for retirement purposes, which is why you need so.

3. Increased Life Expectancy:

Although there are plenty of developments in healthcare, modern people are still living at an older age than their forefathers. Therefore, gradually the average lifespan changes over many years. Therefore, people in developing economies live much more life. While the average life expectancy was 60, it is now 81. Increased life expectancy but with shorter employable age requires personal finance.

4. Rising Medical Expenses:

Medical expenses have been increasing exponentially over the years. For example, expenses of the cost of drugs, hospital admission care and charges, nursing care, specialized care, and geriatric care have increased too much. Several medical expenses don't have insurance policies, including private/individual insurance coverage or federal or national insurance coverage.

If you are from the United States, you will get insurance coverage from employers, private insurers, or the federal government. Senior citizens get Medicare, while people will lower income levels get Medicaid. However, you must observe the extent of the Medicare program with the rising US fiscal deficit and a large proportion of the geriatric population.

But if you are from other developed markets like the EU, most medical care is reimbursed nationally. As a result, the national healthcare budgets started to be tightly controlled. Besides, several new expensive therapies exist which don't belong to the national formularies. It indicates that patients don't get access through government policy. They need to spend money from their pocket to avail these medicines.

Regarding developing nations like India and China, approximately all expenses are out of pocket. It is because no overarching government social security system exists covering medical expenses.

These are a few reasons you should have medical, accidental, critical illness, and life coverage insurance. In addition, the need for personal finance is also immense.

Five Aspects of a Complete Financial:

Savings: Ensure that you must save money as savings to cover sudden financial needs.

Investing: It is essential to grow money to achieve your aspirations.

Financial Protection: It ensures that your family and you can sail through the most challenging times.

Tax Planning: The correct tax planning, like making proper expenditure /investment, helps to reduce taxable revenue. Thus, you can save plenty of money each year.

Retirement Planning: It is vital to ensure you have saved much money for your needs during the twilight years.

Let's discuss what these are in detail.

1) Saving:

You might need a lot of money suddenly. For instance, your car might break down, or you have lost your job. However, you can deal with these emergency events with sufficient savings to cover the need. According to the thumb rule, the fund for the emergency needs has to be three to six months of your expenses.

  • You can choose Debt instruments like Liquid Funds to park the money for emergency requirements. 
These are the three reasons: 
  • These provide better returns than savings accounts though you don't get guaranteed returns. 
  • The funds are highly liquid. Therefore, it is possible to withdraw the money after seven days. 
  • These have negligible credit and interest risk. That's why the money is safe.

2) Investing:

You might confuse investing with saving or find them similar. Hence, you should ensure that saving means setting money aside. On the other hand, investing money indicates putting money to buy any asset ( stock, bond, mutual funds, etc.) to increase your money's growth.

Regarding investment, mutual funds are a good choice if you do it properly. Remember that you must be conscious while selecting the fund in which you will invest your money. Otherwise, you can find it counterproductive. It is vital to make your investment according to the need of investment and horizon. That's why you should establish a timeframe around it. After that, you should choose a mutual fund suitable for your investment timeframe.

Now, a question arises which fund should you select according to your financial goals?

Short-Term Goals: 

It indicates those goals you have to achieve within three years. You may need to arrange funds to save for a trip or a phone within this timeframe.

  • Best investment options: Liquid Funds and Ultra short-term funds are the best investment options.

Mid-Term Goals: 

Have you set a goal that you want to avail yourself of within three to five years? If yes, then we can say it is a mid-term goal. Giving a down payment for a house is an instance of it.

  • Best Investment Options: Hybrid Funds, ELSS, Short Term Debt funds like Banking, and PSU Debt Funds are examples of investment options.

Long-Term Goals: 

If you want to set any goal for a minimum of five years, it is referred to as long-term goals. Some long-term goals are retirement, children's education, and kids' marriage.

Best Investment Options: Multi Cap Funds, NPS (only for retirement), and Large Cap Funds are the best investment options.

3) Financial Protection:

We might weave several dreams in life and create investment plans to turn those dreams into reality. But the same can become a liability unless we protect them with a safety net. That safety net is insurance.

Four types of insurance exist, including:

Term Insurance:

This life insurance ensures your family does not have to go through financial hardship if you die early. The term insurance sum is higher than other health insurance products. Whether you calculate it accurately, it is possible to compute the regular expenses of your family. In addition, you can account for a retirement corpus for your partner. Besides, you can cover various liabilities, including home loans and kids' education.

Health Insurance and Critical Illness Insurance:

If you have health insurance, there is no need to pay from your pocket if you or your family member has taken ill. It can cover all costs, including hospitalization, medication, pre, and post-hospitalization expenses, etc. In addition, you can choose vital insurance with your primary health policy. If you diagnose with one of the critical illnesses mentioned in your policy, the insurance company might spend money to assure you the sum assured.

Mortgage Protection Insurance:

It can pay off the mortgage when you die during the mortgage term. Besides, it ensures that the loan or mortgage for a home, car, property, etc., is not becoming a liability for your family if you die early.

Personal Accidental Insurance:

If you encounter an accident and get injured seriously or partially, you will get the money from the insurance company. They help you to cover the expenses for treatment and loss of income. But your family will get the payment if you die during the accident. The payable amount relies on the fatality of the accident.

4) Tax Saving:

People must pay taxes according to tax slabs. If you want to deduct the taxable revenue to a certain extent, you must invest in the correct fund. Seventy exemptions and reduction choices are available via which you can bring down our taxable revenue.

Two famous sections to reduce taxes are as follows:-

Section 80C: It is the largest pool for tax reduction. People can claim to reduce up to Rs 1.5 lakh under the section to create different investments and expenditures. Some well-known tax-saving instruments include EPF, PPF, NSC, NPS, ULIPs, children's tuition fees, life insurance premium, five-year tax saving FD, ELSS, Senior Citizen tax saving instrument, Sukanya Smriddhi Yojana, and home loan principal amount.

Section 80D: You can do a similar thing under Section 80D. Regarding the premium amount, it is possible to spend money on a health insurance policy. Other avenues exist which can decrease your taxable income.

5) Retirement Planning:

You should know that your most vital life stage is retirement. Ensure that it may be miserable or blissful, but it depends on how you plan for it. It will be true if you want to do any financial planning. You need to follow the two-step method hence. The first one is saving for retirement. On the other hand, the second option is creating revenue from the assets during retirement.

The two steps are as follows:-

Step 1) Building A Retirement Corpus:

You must save money for your retirement time. There are mainly two reasons – loss of income and increased life expectancy. Suppose you retire at 60 and live up to 85. Have you planned how you will spend the remaining twenty-five years after retirement while you won't have any stable income?

Considering inflation is another factor meaning the rise in prices of goods and services for daily use. During that time, the expenses will be increased after retirement. Suppose the monthly expenses are Rs 35,000. But it can be Rs 80,000 per month in 20 years. Remember that you must not maintain similar living standards.

Creating a fund big as a retirement corpus is always a lifelong process. Therefore, you should begin saving money quickly for your betterment. EPF, NPS, and Mutual Funds are the investment options for creating a retirement corpus.

Step 2) Generating Income during Retirement:

While it is vital to ensure that you save sufficient money for your retirement while working, it is also essential to channel that corpus after retirement. Try to make the correct investment to ensure that you will have a steady income. Some good investment options include STP withdrawal/transfer from Mutual Funds, life insurance annuity, and rental income.

What Is A Personal Finance Course?

It lets you know how to manage money and other forms of wealth. For instance, it means how spending money affects your accounts, use of your credit cards, the way through which interest rates make or break your portfolio, etc.

How Long Is A Personal Finance Course?

It is a course of six week where you need to learn short videos embedded with exciting learning exercises. This course enables students to practice their learning.

The Bottom Line:

You should control your finances. In addition, you should have the power to make a life choice except worrying about money. If all aspects of an entire financial picture are in one frame, it can confirm that your financial future is ideal.

Frequently Asked Questions:

  • Q. What are personal finance examples?

Examples of personal finance including how to budget, balance a checkbook, save for retirement, buy insurance, plan for taxes, and make investments.

  • Q. Why is it important?

Managing your money via budgeting, investing, and savings is essential. Long-term planning with potential financial risks is included in this case.

  • Q. What is the most essential part of it?

Cash flow management is a vital part of it. The term means how much money is going in and where that money goes.


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