A Beginners Guide To Personal Finance!

Most Important Things You Should Know About Personal Finance With Practical Tips And A Stepwise Plan To Start Your Financial Journey.

Created by Author with Canva

Hey Terrans!

Welcome back to my publication!

Today we will discuss money. Personal finance to be exact. As we all know money is important to not only enjoy but to live life but unfortunately, we are never taught about it in schools. It’s funny that we are taught about everything we need to earn money, but we are never taught how to use it when we get it.

Jokes apart! It is very important to understand personal finance as it will not only help us in managing our money but also utilize it properly. There is a very common saying over the Internet these days,

“You either work for money or make money work for you.”

With the knowledge of Personal finance, we can make money work for us, and trust me when I say this, “when money works, it works better.”

Today, we will discuss the fundamentals of Personal Finance. These are the most important things that everyone should know, and I have created a stepwise financial plan for you to follow. This stepwise plan is simple and practical and will help you start your financial journey.

So, without any further ado, let us start with some of the most important things to know about personal finance.

Step 1: Build a Strong Foundation:

Like a building, to have a financially sound life, you need to build a strong foundation as well. Always remember that it is the first step so it should be considered before everything. Till it is not done, DON’T START ANYTHING. The first steps should be:

1. Get Insured: Safety first! The very first step should be to get insured. You should have a “Life” and a “Health” insurance as early as possible. It will help you in bad situations (which I hope never arise) and it will also be cheaper if opted at an early age.
2. Build an Emergency Fund: The second step is to create a safety net for yourself. As we all know life is unpredictable and there might be a time when your earnings are less than your expenses. An emergency fund will help you in those situations. To make an emergency fund, calculate all the necessary expenses for a month and multiply it by 6. It is ideal to have a 6 months of emergency fund and it should never be less than 3 months.
3. Plan for Retirement: This might sound odd but as retirement is a very long goal, a small amount of investment can help in gathering a significant amount for your retirement. You can also opt for any of the available retirement savings plans which also help in tax planning.
4. Pay Yourself First: Sounds counterintuitive? It might but it’s not. It simply means that before spending anything i.e. paying anyone else, save your money i.e. pay yourself. It can easily be done by having a separate account and transferring a percentage of your income (30% recommended) into that account as soon as you get the money.
5. Track Your Income and Expenses: This one is a very important but usually forgotten step. You should be aware of where your money is going and have a budget. It is very important for informed financial decisions. You should develop a tracking habit and there are many ways to do it (like budgeting/financial apps or even simple spreadsheets).

Step 2: Manage Debt:

Once the foundation is complete, let’s start with payments. There is an old saying “We have to choose our Demons”, this applies to finance as well. Although the general tendency is to be debt-free, practically sometimes we have to choose the debts and that’s fine till it’s necessary and not to buy a liability. To manage the debts, follow these steps.

1. Resist Lifestyle Inflation: This is one of the biggest mistakes people make. You have to avoid unnecessary expenses and resist lifestyle inflation as your income grows. Remember, always prioritize necessities over wants.
2. Pay High-Interest Debt First: Not every debt is equal, always focus on paying off high-interest debt (like credit cards) first. Different debts have different conditions so calculate them accordingly (like home loans can be used in tax rebates). Make a debt repayment strategy or if possible, transfer the debt balance from high to low interest rates.
3. Develop a Debt Repayment Plan: Create a plan to tackle your debt, prioritizing high-interest debts and making consistent payments. Always prioritize to pay off the debts as early as possible so if you get a situation to lower the EMI or duration, always choose to reduce the duration.

Step 3: Investing for the Future:

Although it’s not guaranteed, if done properly, investments are one of the safest and easiest ways of growing money. Always remember to use a finance rule (like 50–30–20 rule) which you can follow in your life. Keep in mind that every individual has a different life story, so you have to choose the rule as per yours and follow these basic steps.

1. Compound Interest is Your Ally: Start investing a small amount of your money as soon as possible (without costing your life). Remember, with compound interest, the earlier you start investing, the more time your money has to grow. Even small amounts invested regularly can accumulate significantly over time.
2. Diversification is Key: Warrant Buffet said, “Don’t put all your eggs in one basket” and as he is one of the GOATs, listen to him and spread your investments across different asset classes like stocks, bonds, and real estate to minimize risk.
3. Invest for Your Goals: Align your investment strategy with your financial goals. Divide your investments into long-term goals (like buying a house or retirement), and short-term goals (like a trip or debt repayments).

Step 4: Financial Literacy:

The Internet is great and is full of all the knowledge. So sometimes it might feel that we don’t need to learn anything as everything is available to us. But that’s a mistake. Always remember that you should choose to outsource the services which either you don’t have the time for, or you don’t possess the skills. Everything else, learn it. It’s always better to know something even if you are going to outsource it.

1. Educate Yourself: Personal finance as it’s in the name is personal. So, to help yourself in the best way, learn about personal finance. You could read books, listen to podcasts, or take online courses to stay up-to-date on financial concepts and strategies.
2. Beware of Scams: Be wary and protect yourself from financial scams. Remember, if something is too good to be true, it’s not true. Stay away from unsolicited investment offers and do your research before making any financial commitments.
3. Ask for Help: Putting this point here as it’s important. Please remember that even if you gain every piece of knowledge in Finance, you might still need professional help now and then. So, if you need personalized guidance, please consider consulting a financial advisor. Trust me they can help you greatly.

Bonus Tips:

1. Emergency Savings vs. Long-Term Savings: Always keep your emergency fund and long-term savings goals separate. Never mix them up. Additionally, emergency savings should be easily accessible, while long-term savings can be invested for growth.
2. Never mix up Goals: Likewise, never mix up your investments. Your investments should have an aligned and definite goal. It will make it easier to track.
3. Compare Insurances: Having health, car, and home insurance (etc.) is beneficial in protecting you but you have to choose them wisely. There are multiple types of insurance products and not every product is good for you. Please compare and choose them wisely and don’t fall for shiny promises.

Remember, personal finance is a journey, not a destination. Just like life, it is also different for everyone. Additionally, with time, life circumstances can change, so be prepared to change your financial plan as needed or ask for professional help, they can help you create a financial plan tailored to your specific goals and circumstances. By following these core principles and staying informed, you can make sound financial decisions and achieve your long-term goals.

I hope this blog will be helpful to you. Please ask in the comments if you have any questions, I will try to answer them to my full ability. I will also write a few other blogs on topics related to personal and overall finance in the future so stay tuned for them. We will meet again.

I believe these steps will help you understand and manage your finances in a better way.

If not, read it like any other story, and we will meet on my next post.

Till then.

Shreesh, Signing Off!

Originally published at https://theterran.substack.com.

Get an email whenever Shreesh Pandey publishes.