How well do you manage your personal finance?
Managing personal finance is like taming a wild pet. You will not know when you can expect it to go wild. Alternatively, If you control it, impact would be much less.
What is Personal Finance?
Unlike complex Financial planning, personal finance constitutes tracking income, allocating budget, managing expenses, planning for investment or retirement funds for an individual.
One cannot write down in five or six steps for managing finance.You need not be a professional accountant or well versed in debit/credit. The key is to stick with the basics.
Tracking your income
Track how much is getting credited in our account. This could be from multiple sources namely rental income, interest on investments, salary, dividend from shares, bank interest.
Allocation of budget
From my personal experience, I would not recommend allocating a budget. If we allocate a budget and plot the actuals, we may not know whether we are in better off or worse. Further, even if we succeed in plotting on a monthly basis, it may end up in an increase in budget or expense cut. This would go a vicious circle every month. Our mind does not think of the budget whenever we swipe our card in restaurant or shopping centre.Do not allocate a budget for your day to day expenses.
Do not spend more than you earn. Though this seems to be stupid basic, it is actually not. If you cannot afford to spend, do not spend. To understand this, read further.
Exclude your virtual cash which is your credit card.
This is more than imaginable for many persons who are reading this just like me. We are introduced, trained and now committed to use the credit card to manage our day to day life. It should not be forgotten that the market does not accept anything but credit card for few purchases which makes us justify the use of our virtual cash.So what are we supposed to do? Exclude it wherever you could. By this, we are reducing the weight of your liability.You may be surprised to find more information relating to the credit card which I have covered in detail here.
Pay off your balances
It’s just not enough if we use our best judgement to use the credit card, it is even more important to pay off the balances within the date. An ideal person will take advantage of the credit period which gives you breathing space. But any delay would make you liable to pay off more money than you spent through the credit card.
Example : I have $1000 balance on my credit card. I need to pay either 3% or $10 which ever is higher . My bank charges 20% annual interest on my cards/‘outstanding balances. If I manage to pay $30 each month, it will take 50 months to clear off my entire debt and I will end up paying interest of $471.82.($1471.82)
Instead, paying off your balances completely not only clears off your debt but also can save $471.82.
Never borrow just because you have repaying capacity
Many fall prey to attractive low interest rate offered by banks or credit institutions for availing loans, cash back offers when you borrow in excess of specified limit (Credit card purchases). Just because we have repaying capacity now, does not automatically qualify for availing loan with repayment terms of ten years.Remember! Our income does not raise proportionately to our rise in expense.
Few friends of mine had availed housing loan due to their peer pressure and the tax benefits based on their current income level. They have overlooked future commitment of 25 to 30 years. Not all countries provide ownership straight-away on down payment. So, loan repayment adds to our expense basket along with rent, family expense, hospital care, entertainment, child care and other ancillary shopping.What began as investment plan turned to be a burden with no increase in income. Hence , they were forced to cut down their pretty pleasures for some investment which may provide them asset/ownership when they are around 45–50 years old.
If you don’t take care of your personal finance , then personal finance wont take good care of you.