A lot of you believe that personal finance is all about sacrifice. You are putting off good things in life today for a better future. Fierce resistance exists when young people are told about saving more and spending less. The urge to spend more goes down as you age, but it continues to make you hold negative thoughts about personal finance.
As you step back and look at the year gone by this festive season, you may want to look at personal finance in a new light. Managing your money is more about achieving your financial goals. You need to build a credible relationship between your dreams and your financial goals with the help of personal finance. To do that, think of personal finance as a practical toolbox.
You often keep a toolbox at home to fix things on time. At the same time, you may not be an expert electrician, plumber or carpenter. But, you will do the initial mending of things if they break. Your toolbox will help you tighten screws, check wire cables or temporarily fix furniture.
Just like you must maintain things at home with timely cleaning, oiling and servicing, you need to work on your finances. It is not a subject you must study and then appear for tests. There is no need to burden yourself with having to study personal finance.
Dreams and goals
Your dreams can translate into financial goals, and you can achieve them one by one. Personal finance will show you the path towards that dream. Use various tools at your disposal to take that path. Financial discipline is about avoiding indiscretion. As humans, our instinct is to take the easy way out.
A lot of you indulge in shopping as therapy. You make choices based on the money in your hands. If you enjoy impulse shopping, you can work towards providing for that. That can be a common short-term goal. If you have a steady income, you can plan your expenses in such a way that it helps you achieve financial independence and indulge regularly.
A primary requirement to take charge of the money rests on your ability to create a monthly surplus. If you can manage that regularly, you can invest it in a way to meet your short-term and long-term goals. There is a good chance that you may be confused about dreams and goals. If that is the case, you must take professional help. A certified financial planner or an advisor can help you determine goals and give you a plan.
You can apply the ‘rule of 72’ to your investments based on your goals. It is an essential tool of personal finance you can use. If you divide 72 by the return you expect every year; you will get the time it takes to double your money. At a 10% annual return, you will need seven years to double your money.
The safest investment is government securities or post-office schemes.
They offer a 7-8% return guaranteed by the government. Beyond that, you must depend on equity markets to generate a higher return. At the same time, equity assets may underperform in the short term (0 to 5 years), but they do exceedingly well in the long term. Plan your asset allocation with the help of your advisor.
Challenges to your goals
There are two types of challenges to your goals. The first one is about external factors. Interest rates and inflation influence your money, and there is a direct correlation. As inflation rises, you need to work harder to beat the heat. As interest rates rise, you must prepare for a slowdown or a rainy day. If you are an impulse spender, you will have to curb your urge to buy in times of rising interest rates when inflation is high. You must first figure out how to save and invest more for your future expenses.
The second factor that challenges your goals is intrinsic. Your ability to take risks will determine the wealth you create for yourself. All asset classes other than those guaranteed by the government carry market risk. Your confidence to earn a regular and higher income in the future will help you take risks.
(The author is editor-in-chief at www.moneyminute.in)