Money Mastery Series: A-Z Guide to Personal Finance — Part 1
Personal finance is not about having more money, it’s about having control over the money you have, and making it work for you !
Personal finance is like trying to fit all of your clothes into a suitcase before a vacation — sometimes it feels like no matter how much you try to squeeze in, there’s just not enough room. But just like how you can’t leave on vacation without packing your suitcase, you can’t go through life without managing your finances. And just like how you can make more room in your suitcase by rolling your clothes instead of folding them, you can make more room in your budget by cutting back on unnecessary expenses and finding ways to increase your income. And just like how you should always bring an extra pair of clothes, you should always have an emergency fund for those unexpected financial surprises. And just like how you should always double-check that you have your passport, you should always check your credit score to make sure you’re in good financial standing. Personal finance may not be the most glamorous thing in the world, but it’s a necessary part of life’s journey. So pack your financial suitcase wisely and enjoy the ride.
Read my earlier article on quick summary of life-changing personal finance books to read in 2023
In my Money Mastery series, here is an article on my A-Z personal finance guide which help’s one to keep key concepts in mind. Here is a ballpark view of what you’re about to see in this article.
A: Asset allocation — Diversifying investments to balance risk and potential returns.
B: Budgeting — Creating a plan for spending and saving money.
C: Credit score — Numerical rating of creditworthiness.
D: Debt — Money borrowed with interest to be repaid.
E: Emergency fund — Savings for unexpected expenses.
F: Financial advisor — Professional providing investment and planning advice.
G: Goals — Specific, measurable and time-bound financial objectives.
H: Hedge — Strategies to reduce financial risk.
I: Insurance — Protection against potential financial losses.
J: Joint account — A shared financial account.
K: Knowledge — Understanding personal finance to make informed decisions.
L: Liquidity — Ability to access cash quickly.
M: Mutual funds — Investment vehicle pooling money from multiple investors.
N: Net worth — Total value of assets minus liabilities.
O: Opportunity cost — Cost of an alternative foregone for a certain action.
P: Passive income — Income requiring little to no effort.
Q: Quitting debt — Paying off all outstanding debt as soon as possible.
R: Risk — Possibility of losing value on an investment.
S: Savings — Money set aside for future use.
T: Tax planning — Organizing finances to minimize taxes.
U: ULIP — Unit Linked Insurance Plan, an investment and insurance combo.
V: Value investing — Buying undervalued stocks or securities.
W: Will — Legal document outlining distribution of assets after death.
X: eXpenses — Money spent on goods and services.
Y: Yield — Return on an investment, often expressed as a percentage.
Z: Zero-sum budget — Allocating all income to expenses or savings with no leftovers.
Let’s try to deep dive into each of the topics from A-Z for a deeper understanding.
Asset allocation — the process of dividing an investment portfolio among different asset categories such as stocks, bonds, cash, real estate, and alternative investments. The idea behind asset allocation is that different types of assets perform differently over time, and by diversifying your investments, you can reduce your overall risk while still participating in the potential returns of different markets. This can be done through a combination of passive or active strategies, with the goal of creating a balance that aligns with your risk tolerance and financial goals. Asset allocation is considered one of the most important decisions an investor can make as it has a significant impact on the overall risk and return of an investment portfolio.
Budgeting — the process of creating a plan to spend your money by allocating your income towards expenses, savings, and debt repayment. It involves identifying your income, expenses and creating a plan to ensure that you live within your means and meet your financial goals. It also includes tracking your spending, and making adjustments as needed to stay on track. This can be done through a variety of methods, such as creating a spreadsheet, using budgeting apps, or working with a financial advisor.
Credit score — a numerical rating that represents a person’s creditworthiness, based on their credit history. Credit scores are used by lenders, landlords, and other organizations to determine a person’s credit risk. A high credit score indicates that a person is a responsible borrower and is more likely to make loan payments on time, while a low credit score suggests the opposite. A person’s credit score is determined by a variety of factors including payment history, credit utilization, length of credit history, and types of credit.
Debt — money that is borrowed and must be repaid with interest. It can come in many forms such as credit card debt, student loans, personal loans, and mortgages. Debt can be useful in certain situations, such as financing a home or education, but it can also become overwhelming if not managed properly. High levels of debt can lead to financial stress and difficulty in meeting other financial obligations. To manage debt, people can use methods such as budgeting, debt consolidation, and working with a credit counselor. Additionally, it’s important to understand the terms and conditions of the debt, such as the interest rate, repayment period and any penalties for late payments. It’s also important to prioritize paying off high-interest debt first and to try to pay more than the minimum payments.
Emergency fund — a savings account set aside for unexpected expenses, such as a job loss, medical emergency, or major home or car repairs. An emergency fund is designed to provide a financial safety net, so that you can cover unexpected expenses without having to rely on credit cards or loans. It is generally recommended to have enough money in an emergency fund to cover three to six months of living expenses. Building an emergency fund typically requires consistent saving over time and may require cutting expenses or increasing income. It’s important to have easy access to the funds, so keeping it in a savings account or a short-term certificate of deposit is recommended. It’s also important to not touch the funds unless it’s a real emergency, so that you will have the money when you need it.
Financial advisor — a professional who provides advice on investing and financial planning. They can help individuals, families and businesses create a financial plan that aligns with their goals and objectives. They can also provide advice on a wide range of financial matters such as retirement planning, tax planning, estate planning, risk management and investment management. Financial advisors can be either fee-based or commission-based, and may be held to different regulatory standards depending on the type of advisor. Some advisors may be registered with regulatory bodies and may have to meet certain qualifications. It’s important to check the credentials and background of any financial advisor and make sure they are suitable for your needs before working with them.
Goals — specific, measurable, and time-bound objectives for your finances. Setting financial goals is an important aspect of personal finance management, as it helps individuals to focus their efforts and make progress towards achieving their desired financial outcome. Goals can be short-term, such as saving for a vacation or a down payment on a car, or long-term, such as saving for retirement or paying off a mortgage. It’s important that financial goals are specific, measurable, and time-bound, which means that they should be clearly defined, with a specific target amount and a deadline for achieving them. Achieving financial goals usually requires a combination of budgeting, saving, and investing. Setting and achieving financial goals can also help to improve motivation and discipline with managing money, which in turn can lead to better financial well-being.
Hybrid investment — An investment that combines characteristics of different types of assets or investment strategies. Examples of hybrid investments include hybrid mutual funds, which blend stocks and bonds in a single fund; hybrid annuities, which combine elements of fixed and variable annuities; and adjustable-rate mortgages, which combine features of fixed-rate and adjustable-rate mortgages. The goal of a hybrid investment is usually to provide a balance of stability and growth potential, or to offer a combination of different benefits such as income and growth or safety and liquidity. However, it’s important to note that hybrid investments can be complex and may come with higher fees and risks, it’s important to do your research and understand the terms and conditions before investing. It’s also important to consult with a financial advisor to see if a hybrid investment aligns with your overall financial goals and risk tolerance.
Insurance — a form of risk management to protect against potential financial losses. It is a contract between the policyholder and the insurer, where the insurer agrees to compensate the policyholder for a specific loss or losses in exchange for a premium. There are many different types of insurance such as life insurance, health insurance, car insurance, homeowners insurance, and disability insurance. The goal of insurance is to transfer the risk of potential financial losses from the policyholder to the insurer. It can also provide peace of mind and financial security in case of unexpected events. However, it’s important to understand the terms and conditions of the insurance policy and make sure that it aligns with your needs and budget before purchasing. It’s also important to regularly review and update insurance coverage to make sure it stays adequate over time.
Joint Account — A bank account that is held by two or more people and can be accessed by all account holders. Joint accounts can be used for a variety of purposes such as managing household expenses, saving for a shared goal, or providing financial support for a dependent. Joint accounts can be held by any type of relationship, such as spouses, partners, friends, or family members. It’s important to set clear guidelines and expectations for the account, such as how the money will be used and who will manage the account. It’s also important to be aware that each account holder is legally responsible for any debts or charges incurred on the account. Additionally, it’s important to understand the rights and responsibilities of each account holder before opening a joint account.
Knowledge — understanding of personal finance principles and how to manage your money. Knowledge is the foundation of personal finance management, as it allows individuals to make informed decisions about their finances. It includes understanding basic financial concepts such as budgeting, saving, investing, credit, and taxes. It also includes understanding how financial products and services work, such as mortgages, insurance, and retirement plans. Having knowledge about personal finance can help individuals to create a financial plan, reach their financial goals and make better decisions about their money. It can also help to avoid common financial mistakes and protect against fraud and scams. There are many resources available to learn about personal finance, such as books, websites, podcasts, and financial literacy classes.
Liquidity — the ability to access cash or cash equivalents quickly, without significant loss of value. Liquidity refers to the ease with which an asset can be converted into cash or cash equivalents, such as a savings account or money market fund. Liquid assets, such as cash or savings accounts, are considered highly liquid because they can be easily converted into cash without losing value. Other assets, such as stocks or real estate, are considered less liquid because they may take longer to sell or may need to be sold at a discount in order to be converted into cash quickly. Liquidity is important for both businesses and individuals, as it allows them to meet short-term obligations, make investments, and take advantage of opportunities. It’s important to maintain an adequate level of liquidity as a part of overall financial planning to ensure that you have access to cash when you need it, whether it’s for an emergency, or to make an investment opportunity.
Let’s continue with M-Z of Personal Finance in the Part 2 of this article.
I’m Arun Prakash Asokan & that’s a wrap of Part1. Follow me in here on Medium for more valuable content on personal finance, money management, AI & Tech. ☺
