There are two types of person found in world, first who get their salary/income and spend it without thinking something in other side a man who get his salary and first, plan how he should manage money, first he will fulfill his needs than invest / save some amount to capture his future goals and after that he will spend remaining money. Today, we will discuss how you can be the second one, so that you can fulfill all your dreams with good financial planning.

According to SEBI and National Centre for Financial Education there are ~27% Indians considered as financially literate, It means ~75% of us do not even have the basic knowledge of finance. Today we will discuss some topics related to Personal Finance for Beginners, so that you can make better financial decisions.

Where does your money come from?

Today you can start investing, saving your money but if you can't remember your income then it can be a major thing. Income is all about from where you are getting money, it can be your job, business and rental income etc, and there is a noticeable line “from where you are getting money” you should know about your income sources, let's explain.

There are mainly two type of income sources

Active Income

It is the income you are getting by working actively, you are working at your office, you are working as a professional etc. Active Income based on how much time you work for the firm, company, it is a common source of income in our country.

Salary

It is an income you get in the exchange of your time and ability, you get it at the end or start of month depending on your business manager.

Profession

Profession is a skill, your learning, your ability that helps you to make income, means you provide services based on your skill and take charge. For example Vijay is a MBBS passed out student, he started working as a heart surgeon at Red Fort Hospital, and earns money by curing heart patients, this is his profession. First he masters the skill and then he makes money in the exchange of service.

Business

Business is another way to make your income. It can be active income or a passive income source depending on the owner's choice. Business is where you provide services and goods to consumers to make profits. For example Arun's sweet shop where he sells sweets to make money.

Passive Income

Passive Income is the income you got without working actively, thinking you are making money while sleeping, eating, playing etc. To make money passively first you must have an active income source that brings money to you then you are able to make a system that works for you and make money for you while you are not working actively. Renting a house is a commonly found example of Passive Income, you rent your house to get rent, but first you must be able to build a house then you can lease it.

Again, first you must find an Active Income source then you can build a system that brings you money.

Find where you are losing money?

If you are from those who forget where they lose money? Before the month ends, most people don't know where they lose their money and that is the major problem of they can't save money for the future. So, you must know about your expenses, you must have the information about your expenses, from where you are getting money? Where are you losing money, whatever you purchase you should account that in your notebook also you can use the best app to track your expenses.

You must try to lower your expenses first. Many of us have more expenses but lower income. Those people should invest money instead of wasting more, neither can they be stuck behind a huge burden.

Plan where your money will go?

Have you heard about how rich people get richer and poor people get poorer? The problem behind this is poor people don't know what money is? How can we use it? How does the value of money grow through time?. Many of us get their salary but don't think how we can use it so that it grows by time.

How do you spend money?

Mainly every person spend their money on these three ways

  • On Needs - Need are things you must buy after getting your salary like Foods, Clothes etc, because those needs are more important than others.
  • On Wants - Expenditure on want is shown as wasting of money, somewhere it is true but if you manage it properly then there is no problem. But if you are choosing Wants over your needs then it is a bad habit.
  • Saving – Every person has many goals in his life, someone who has a cycle wants a bike, someone using a bike planning to purchase a car. Everyone has goals, so every person spends some money from his salary as savings to fulfill their goals.

Move to budgeting

Have you seen, in India, the marriage of a girl is the biggest challenge for his father? He saved money, he worked more, he rented his property to marry his daughter. That is the common goal of a family to bid farewell of his daughter. There are many goals like this, but how can you save money to fulfill your dreams? Because dreams have no limits, but you know you have a limited amount of money to spend on your wants, they can be anything.

So, how you use, manage, spend and invest your money to fulfill your dream can be called budgeting. My father before he goes to shop first he makes his budget, how much he should spend on that thing he needs then he goes there. For every money related decision first you must make a budget to execute that also you can use a budget planner app.

Three Questions you should tell to yourself before buying something

  • How useful will this thing be to me?
  • Does its price match its quality?
  • Can I get anything better at this price?

Rule of 50-30-20

The rule of 50 - 30 - 20 is a good rule for budgeting. According to this rule you must spend your money in this way to get free from money problems.

The rule says that, when you get your salary first you must fulfill your needs. 50% of your income should be spent on your needs such as food, clothes, room rent, electricity etc.

30% of your salary you can use on your wants such as party, travelling, picnic etc, you can lower your wants so that you can save more money.

Then remaining 20% you must invest in things such as Bonds, Fixed Deposit, start Systematic investment plan, Stock, Real Estate etc. You can increase the percentage of investing by lowering your expenses.

Example of 50-30-20 Rule

Lets understand with an example- Monika Sharma is a consultant at money vault and she has a salary of 10,0000. At month end when she get her salary she distribute his salary in three part, 50000 she spends on her needs her room rent his child fee, her electricity etc. then 30000 she spend on her wants her beauty products, on pizza burger junk food etc and remaining 20000 she invest on stock market, also here she Diversify her money to maximize returns and lower the risk. By the way, she was happy with her life because she had a proper budgeting strategy.

Emergency Funds

It is the money you save for bad negative days because time can't be predicted so, everything can happen anytime, since you should save some money as an Emergency Fund. Note that Emergency Funds are different from your saving or Investment, you can not use your investment as emergency fund.

Many people don't have any Emergency Funds, and when they are not Financial Stable they break their Saving or Investment for their needs and that is wrong. Since, Emergency Funds are equally important as Investment or Saving.

How much money should you have as Emergency Funds

Generally, Everyone says that you should have your salary 6 times as Emergency Funds but we prefer that it depends on you, what is the worst condition you think that can happen, you should have minimum 6 times your salary as Emergency Fund but you can maximize this on your expecting situations. But if you decide to have a 6 month budget, that is also enough.

Where to invest fund for growth

Inflation decreases the purchasing power of money by the time, So, you must invest your Emergency funds to beat the Inflation.

Many of us put that money in a savings account where they get 3 - 3.5% annual returns, not bad, but the problem is inflation is growing 6-7% annually. So, you must invest that money in those categories where you easily beat inflation. The best and safest way I know is Liquid Funds, Liquid Funds provide liquidity, you can withdraw and deposit your money anytime without any exit load, with that they provide 6 - 7% of Annual return with safety. So, if you want, you can invest in liquid funds for liquidity, safety and equal return as inflation, but first consult it with your investment adviser for more clarity.

Don't forget that emergency funds are made for financial crises or financial instability, so try to not invest your money in risky and long term vision categories like Stock Market, Gold, Real Estate, Index Funds, Mutual Funds etc.

Common Mistakes that beginners avoid

  1. Start spending without tracking expenses.
  2. Spend more instead of Saving.
  3. Choose Spending over Investing.
  4. Keep Money in a Saving Account.
  5. Investing money without knowledge.
  6. Ignoring Emergency Fund.

Start these things from now

  1. Install an Expense tracking app to track your expenses or you can manually track your expenses.
  2. Use a budget planner app to make your budget.
  3. Also can follow a simple budgeting rule (50-30-20 rule).
  4. Start Saving or Investing at least 20% of your income.
  5. Build your Emergency Fund.

Conclusion

In the end, today if you understand how you can manage your money then, there are no financial crises for you. Everyone who is facing money problems, the reason behind this is lack of knowledge in personal finance. So, start managing your money instead of keeping and stay learning about finance and feel it in your daily life.