For many who are new to the world of personal finance, knowledge is a sort of a mental block. Just like mathematics, finance is considered complicated. A key reason is a dislike for numbers. But whether you like it or not, you end up doing maths over money almost every day.
You remember the prices of essential goods or services a month earlier. You can recall that prices have jumped today. You know from your bank statement that you are spending more each month on the same quantity or quality of goods.
No matter your background, you end up doing the maths. You could be a history, sociology, arts or sciences buff. But, the fact that you are spending more doesn’t escape your socalled non-mathematical or non-financial mind. You manage that despite your lack of interest in maths.
Even a basic appreciation like that saves you money. It helps you conserve the wealth you got. However, that understanding is not enough to grow your wealth. Your savings have to become investments that beat inflation every year comfortably.
So, if the average inflation rate is four per cent, your finances have to generate a return of at least eight per cent each year. As a thumb rule, your investments have to make twice the return over the inflation rate.
Set yourself a learning goal
If you are not into numbers or finance, you need to set yourself a learning goal. You want to ensure that your financial future is secure. You want to realise your dreams and lead a fulfilling life. While money may not be everything, it is a critical enabler. You have no control over the inflation in the economy. But with some effort, you can get control of your finances.
If you are in your 20s and 30s, this is the single most important habit you need to teach yourself. An excellent first step is to appreciate the importance of being ‘cash surplus’. In a book titled ‘Get a Financial Life’, personal finance expert and author Beth Kobliner explains paying off credit card debt as a first step. Banks and financial services firms are eager to lend.
They would entice you with offers and reward points. Use credit cards only if you are paying off the ‘total amount due’ within the stipulated 45 days period. Revolving credit is not a good idea. You pay interest of over 45 per cent per annum for any outstanding on your credit card beyond credit-free period. You can never consider yourself a cash surplus if you owe money to banks or others.
Loans must be used only when you are creating assets. So home loans can go a long way in helping you with that. It is the cheapest form of borrowing an individual can get. Go for a home loan only when you can make a down payment of at least 20 per cent of the value.
Financial knowledge is not as difficult as it is made out to be. Just like your day-to-day shopping for grocery or other essentials, financial planning needs more of common sense than a lot of knowledge.
Harold Pollack, a professor, University of Chicago, once said in an interview that all the financial advice could be written down on a 3”x5” inches index card. It highlighted the importance of starting early in a pension fund, investing in an inexpensive index fund, advising on not buying shares directly, saving 20 per cent of whatever you earn each month and a few others.
While many may consider this as an oversimplification, it may be worthwhile to read about the concept of the index card. That is an excellent first step in understanding more about personal finance. Your background doesn’t matter if you wish to create financial goals. Buying your own home or starting up your business venture requires you to create a cash pool.
You are lucky if you inherit the money you need. We will assume most of you are on your own. Creating such a pool would require you to pay attention to financial matters. Yes, personal finance is a vast subject. But if you break it down into smaller goals and tasks than think of it as a complex web of data, numbers or information, you may be better off than many.
Follow this personal finance advice 45% interest you pay for any outstanding on your credit card beyond credit-free period. Use credit cards if you are paying off the due within stipulated time 20%
down payment should be made of the total value if you are going for a home loan. Loans must be used when you are creating assets. Home loans can help you do that
(The writer is editor-in-chief at www.moneyminute.in and can be reached on his twitter handle @rajas73)