Personal Finance-1

As discussed earlier, Personal Finance is an exercise to plan your Finance so that you have enough money for your immediate Financial needs, savings for higher education of your children and planning for retirement. All Financial planners recommend for early action on your planning but I think this planning can be started at any stage of your life but sooner the better as the insurance premiums keep increasing with age and the gap between your current and retirement age keeps decreasing making it difficult for your money to grow enough .However you need to have resources to generate income to fulfill all these goals. It could be through your salary,business or any other regular stream of income. The art of managing your income, expenses and savings comes from within by becoming finacially literate which does’nt cost you much. A rough calculation on a small piece of paper willl be enough every month to provide you the much needed expertise in personal finance. Lets start from the first step:

1. Minimum Emergency Fund: You need to create this fund to overcome the unforeseen circumstances. You may be contemplating to leave the job and looking for better job options or there could be a slump in your business due to sudden defaults by the debtors/unfavourable market conditions. In such circumstances you can’t afford to stop living your life style, maintaining the social status, pursue education of your children and other routine expenses. To maintain a buffer, you need to have a minimum bank balance equivalent to 4 to 6 months of salary/income in your Bank account. This will provide you comfort level to search for the new job or to tide over the adverse market conditons. If you are drawing a monthly salary of 10000$, you need to maintain an emergency fund in your bank account to the tune of 40000$ to 60000$. You will agree that this cushion will not let you down when you are not getting regular salary/income
2. Insurance: Most of the planners rank this item at number four in priorty but I would prioritise to suggest obtaining of Life Insurance or Term Life Insurance Cover for the earning member of the family to safeguard against any future risk to life or permanent disability. There is no need to get LIC for all the members of your family. The total quantum of Life Insurance Cover should normally be 8 to 10 times of annual salary/income. For example if your salary is 100000$ per year then the total cover should be 800,000$ to 100,0000$. Fortunately the amount of insurance premium for a Term Life Insurance Cover is very small and it keeps increasing with the age. This amount is sufficient to ensure that your family does’nt feel the financial issues when you are not around and continuity of education of your children is guaranteed. Besides a Medical Insurance/Health Insurance cover needs to be taken for all the family members as the ever increasing medical/hospital bills can cause turbulance in the entire budget of the family and whole financial planning could be paralysed. I will prefer for a Medical Insurance coverage of 500000$ under a family floater scheme which does’nt cost you much and every member of the family is covered by a single policy.
3. Savings: Having covered the uncertain part of your life upfront, I will prefer you to save a minimum 25% of your Net income and keep aside to invest for creation of wealth. This investment will start earning for you and take care of all your sustenance expenses when you are not working after retirement. You can invest these funds in high yield Securities, Stocks, Real Estate, Mutual Funds as per your interest and opportunities available
4. Monthly Household and Life Style Expenses : This takes away the major piece of your cake as your Bills, School Fees,Grocery,Utilities, Car maintenance, Hotel Bills and Club Memberships consume maximum part of your budget. You can allocate 60% of total income under this expenditure. Though Credit cards make a second line of defence to meet the unexpected unplanned expenditure for buying a computer/Bike for the children but effort should be made to pay off the bills regularly and in no case the part payment ever be made for the credit card bill as the balance will attract a huge rate of interest. The Credit Card companies will keep coxing you for the minimum amount for obvious reasons Under all circumstances, the allocation of 60% should be used for payment of all bills including credit card bills

Hope to come back again tomorrow with further inputs but I will wait for your feedback and suggestions to make this exercise more interesting and simple.

Have a great day!!