Introduction to personal finance

Personal finance is a process of managing one’s income, expenditure, savings and investments. Often people devise a financial plan or take help of an expert to do the same. To know more about personal finance, building wealth, tax planning, retirement planning, and goal-based investing, read our informative blogs here.

What is personal finance?

Personal finance is a broad concept that revolves around income, saving, and investing. Personal finance also covers, banking, insurance, retirement planning, tax planning and budgeting, etc. The concept mainly is about achieving personal goals. The financial goals can be anything from saving for short term financial needs, or long term financial needs, for retirement, for child’s education, for a vacation, etc.

Personal finance helps in planning an investment strategy depending on an individual’s income, expenses, lifestyle, and goals. It helps in devising a plan within an individual’s financial constraints.

Managing finances is easier said than done. It requires proper planning and budgeting. To be able to design an effective personal finance plan, one has to be well aware of all the investment alternatives available in the market. Picking the best one that perfectly aligns with the goals is essential.

Areas of personal finance

Personal finance can be broken down into five main areas. They are income, spending, saving, investment and protection.

Income

Income is a resource which an individual receives. One uses the income to support their needs and that of the family as well. One can earn income from their job through salary and wages. Or as profits from a business or any other source. The income earned is used for meeting expenses, saving for future needs and investing for earning returns on the same. Individuals must focus on generating multiple sources of income and should never rely on just one source.

Spending

Majority of an individuals’ income is spent on meeting basic needs and living comfortably. Spending includes all expenses an individual incurs in buying goods and services. However, it doesn’t include investments. One usually spends money on rent, EMIs, food, clothes and entertainment. If the expenses are within one’s income, then there is a scope for saving and investing. If the spending exceeds income, then there is a deficit. One has to keep their spending in check and manage their expenses efficiently.

Saving

Saving is an integral part of managing personal finance. The amount that is not spent is usually saved so it can be used in the future. Savings are generally kept in hard cash or bank accounts. It is always good to set aside some money from the income for emergencies and uncertainties. One is advised to have an emergency fund which includes at least six months of expenses.

Investing

Savings often give no return or meagre return. They cannot beat inflation. Hence investors are advised to invest. Often saving and investment are used interchangeably. However, saving is just a surplus of income overspending. While investing involves purchasing an asset with an intent to make money out of it. Investing involves a certain risk in it. Few standard investment options are stocks, bonds, mutual funds, real estate, gold, commodities, art, etc.

Investing is one area of personal finance, where individuals seek the most professional advice. Experts often suggest an investment portfolio based on the investors’ finances and understanding of risk. One of the most popular investment options in the market is mutual funds.

Mutual funds are investment vehicles that pool money from different investors to invest in different assets. It is one of the most accessible investment options for everyone as they can invest with an amount as low as INR 500.

In this digital era, mutual fund investments can be easily made online. Scripbox is an online platform that facilitates mutual fund investments. By using its proprietary algorithm, it picks the best funds from the universe of mutual funds. Scripbox also has predefined financial goals, where one can invest in the goal they want to achieve.

Following are the investment plans that Scripbox has:

Save smart

This plan aims to give better than FD returns by suggesting the best debt mutual funds to invest. The ideal investment horizon is three years or below. One can use this goal for buying a car, or saving for a vacation or to save money for a down payment.

Be emergency-ready

Surprise expenses come our way during the least expected times. Being ready for these should be the first step towards starting an investment journey. Scripbox’s ‘be emergency-ready’ plan suggests best liquid funds to park money. It offers a better return than a savings bank and is highly liquid. One can withdraw their investment within one working day.

Build wealth

This plan of Scripbox is for building wealth for the long term. It is curated with the best equity mutual funds. The ideal investment horizon for this plan is above five years. One can use this goal for retirement, child’s education, or to grow wealth.

Principal protection

This plan provides dual benefits of protecting the principal amount and growth. One can invest in this though lump sum route. This plan first invests money in a liquid fund and then by way of STP transfers money to index funds. Ideal investment horizon is over five years.

Save tax

Tax planning is an integral part of personal finance. Scripbox’s save tax plan helps in saving tax and  at the same time helps in long term capital appreciation. This plan suggests top ELSS mutual funds for saving tax.

Achieve life goals

This plan of Scripbox provides customized plans for retirement, child’s education, and to achieve dreams. One of the plans in this is ‘my first crore’. This plan suggests how one can build their first crore. It also shows how long it will take to build a corpus of one crore.

The next plan under the life goals is ‘retire confident’. This plan takes into consideration the amount of current expense and age of retirement. It projects the amount of money one needs to live a stress-free retirement.

Children’s education is a significant expense. Often to give the best education, one needs deep pockets. Hence investing in it is the only way out. This plan of Scripbox suggests how much college education would cost by the time your kid reaches that age. It also suggests plans accordingly.

‘Dream planner’ goal helps in achieving one’s short term goals without having to pay hefty EMIs. One can select a predefined dream or build their own. Scripbox suggests mutual funds based on the investor’s requirements.

Protection

The last area of personal finance is protection. Protection of finances refers to guarding one’s finances against unforeseen or adverse events. People usually buy life insurance, health insurance, car insurance, etc. to protect themselves and their close ones from any sudden events. Along with investing, people prefer taking the help of an expert for their insurance needs as well.

Why is personal finance important?

An individual has to be financially literate to make the best out of their income and savings. Personal finance is necessary because it helps in managing income and expenditure to save for the future. Following are the reasons why personal finance is important:

Easily manage money

Personal finance will help in managing money. It helps in understanding the spending habits and expenditures. This way, one can easily have a tab on their expenses and better manage their income.

Keeps control on spending

Through personal financing strategy, one can have a clear understanding of their expenses. This will help in controlling unnecessary expenditure. Moreover, this will lead to having some additional savings. Personal finance also helps in paying off debts and has control over credit card spending.

Savings and investments

Being able to properly budget income and expenditure will help in saving and investments. Personal finance planning will help exactly doing that. With a better understanding of the financial position, one can plan for investments and achieve their goals. Also, it is essential to increase savings and investments as income increases.

Offers security

Personal finance encourages investments. Having a well thought through investment plan will help in safeguarding the future. In emergencies, one doesn’t have to worry about financing them. The investments will help in addressing any contingencies.

Growing assets

Investments help in increasing the net worth of an individual. With a planned and disciplined investment approach, an individual can easily achieve their financial goals and increase their assets. Small investments made for longer durations will help in building a good asset base. One can use these investments either for their retirement, or child’s education or to buy a home.

Personal Finance Planning Tips

Following are some tips for personal finance planning:

Start investments early

Starting investment from an early stage of life will not only give more time for the investments to grow but also allows investors to invest in small amounts to reach the goal. Investors also benefit from the power of compounding. However, starting early doesn’t work if the investor redeems the investment. The investor has to stay invested until the goal is reached to get maximum benefits from investments.

Save regularly

Consistency is the key to master anything. Similarly, to reach the said goal, investors have to invest regularly. Also, investing regularly will help reduce the average cost of investing, in turn, boosting the returns.

Make a budget

Having a record of incomes and expenses, and planning the expenses will help keep track of financial goals. Having a budget in place will help individuals to cut down on unnecessary expenses and increase savings and investments. A budget will also help to track financial progress.

Have a long term investment horizon

Investing for the long term is the key to making significant returns. As the investment grows, the volatility in investment reduces too. By investing in the long term, one can benefit from the power of compounding. This means that interest will earn interest. Hence investors returns are magnified in the long term.

Create an emergency fund

Having an emergency fund should be the starting point of an investment journey. An emergency fund is money set aside for uncertainties. One must have at least six months of expenses worth money in an emergency fund. This will help in times of sudden or adverse events like job loss, medical emergencies etc.