Monday, May 27, 2013

Personal Finance


Not all of us are intrigued by the immense beauty of the financial world, given to the numerical and quantitative hurdles and we try our best to avoid it. But, as I have always stressed that Finance is woven into our lives and none of us can escape it, so that part of Finance is what we will deal with now, namely Personal Finance.
Finance can be defined in numerous ways but the most basic definition that sums up its working is the management of one’s assets and liabilities in the most profitable manner. This can be for a government, a corporation or merely an individual. We may realize it or not but we are the financial managers of our own lives. And if this scares you, then My Finance Times is here to guide you.

 For some of us this financial management starts even before we become legally adults in the way of effectively managing our pocket money. But, as we start earning, maybe through our internships or jobs, this financial management becomes tougher and continues even after retirement.

So, in order to effectively manage your funds, there are many considerations for you to beckon upon:

  1. Your age: You can be a student, an intern, a new recruit or the manager of a company. It is very important for you to consider your age in managing your funds as every age comes with its own set of requirements.
  2. Position Statement : Assess your assets and liabilities and put them together to find out your net worth using the simple formula : Assets-Liabilities= Net Worth
  3. Income Statement: This will consist of your incomes and expenses. Try to be as accurate as you can. Also keep in mind the variability of your income, whether it is stable or not.
  4.  Cash flow statement: This involves all the sources of cash and flow of cash to calculate cash in hand.
  5. Future Contingencies: If you are a parent and you are contemplating a hike in school fee, you need to focus more on the cash in hand with you. On the other hand, if you are nearing retirement, probably you would want to increase your net worth before retiring.
  6. Dependents: Whether you are earning for yourself or your family members are dependent on you is vital in deciding your financial goals.
  7.  Country: Your resident country is also a deciding factor. Every country has different governmental policies and framework, also the infrastructure, economic condition, inflation or deflation has to be taken into account.
  8. Degree of required protection: Opting for a life insurance, car insurance, medical insurance, marine and fire insurance at the appropriate time in your life.
  9. Tax Obligations: If you have a house, you have a house tax to pay, if you don’t you do not. So, not everyone will be subject to the same category of taxes and obviously not the same amount. Be sure to account for both direct as well as indirect taxes.
  10. Time Value of Money: The last, but the most important is the time value of money. Always remember the value of money you hold now will always be greater today than tomorrow. This is a golden rule for every sort of financial planning
 These factors will help you to decide:

  • The risk-benefit trade off that you are ready to absorb
  • Your Financial goals
  • The pathway between your current position and your goal
  • Help you make investment choices

According to your current position and your financial goals, you need to set up a plan. Such a process is known as financial planning.

  • Everyone can have different requirements based on the considerations mentioned above. Someone may need a higher cash in hand or someone may want a higher net worth. Accordingly, you can make your projected cash flow statement or position statement and then make a plan to achieve the projections.
  • The risk-benefit trade off will help you to decide on various investment options. Whether you want to go for Mutual funds, debt, equity, gold, real estate or simply a fixed deposit account.
  • Even simpler day to day measures like going for a cheaper substitute of your favourite grocery items, spending less on holidays must be incorporated. An Income-leisure trade off will help you to decide on such cuts in expenses and expenditure.
  • A careful analysis of the numerous insurance schemes and the selection of the most appropriate one is important. Insurance will cover unexpected future contingencies but at the same time, the payment of premiums will reduce the cash in hand. Thus, the trade off must be carefully selected.
  • Financial planning is a continuous process. So always keep in touch with the latest news of the finance world to make changes in your plan accordingly to mitigate losses.

 Personal Finance is logic with oodles of common sense, however if not applied properly can run into tons of quantitative computations. So, if you want to avoid it, start planning now. 

| Simran Ahluwalia |

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