Five Crucial Elements Of Personal Finance

Five Crucial Elements Of Personal Finance

Our ignorance of the necessary actions to take to safeguard our financial future is one of the main causes of our failure to do so. We act in accordance with our moral convictions, yet it may not always be enough. As a result, it's critical to understand the important areas to concentrate on while making a plan for your financial security.

We shall discuss several facets of personal finance in this blog to provide you with a sense of what your overall financial picture ought to look like. 

To begin with, it is important to note that there are five dimensions to a person's overall financial picture. Not in any particular sequence, they are retirement preparation, tax planning, financial protection, investing, and saving. 

The five components of a whole financial picture are as follows: 

saves: You must set aside funds for saves in order to meet unforeseen expenses. 

Investing: Investing is crucial to financial growth and the achievement of your goals. 

Financial protection: Currently, insurance provides financial protection, ensuring that you and your family can weather difficult times. 

 Tax planning: By reducing your taxable income and making sufficient investments and expenditures, you may reduce your annual income and save a significant amount of money. 

Retirement preparation: Lastly, retirement planning is essential to guaranteeing that you have a sizable bank account set up exclusively for your requirements in your later years. 

We will now go into further depth on each of the five aspects: 

First thing first: saving

Unexpected financial needs might arise at any moment. It may be as simple as a vehicle breaking down or as important as losing your job. But, if we have enough funds to meet the needs, we can handle such emergencies. Generally speaking, three to six months' worth of costs should be set aside for emergency needs. 

Liquid funds and other debt instruments are great places to stash money set aside for emergencies.  And these three arguments to support that idea: 

First, while there is no assurance of return, liquid funds provide somewhat higher returns than your savings account. 

Second

you may withdraw the money after seven days since these funds are quite liquid. 

Third, your money is secure since they have very little credit and interest risk. 

The Second: Investing 

Frequently, we mistake investing for saving, or we think they are interchangeable. While investing is depositing money/purchasing assets like stocks, bonds, mutual funds, etc. to help your money grow, saving is putting money away. 

Now, in terms of investing, mutual funds may be a great choice if they are handled properly. Nonetheless, it is crucial to use caution while selecting the appropriate mutual fund for your investment; otherwise, it may backfire.  Therefore, it is crucial that you make your investment in accordance with your investment goals and time horizon. 

The general guideline in this case is to translate your aspirations into monetary objectives and establish a deadline. Select a mutual fund after that that fits your investing horizon.

Now, which funds should be chosen based on one's financial objectives?

Short-term objectives: Short-term objectives are those that must be completed in three years. There are other things for which one has to prepare cash within this period, such as saving for a phone or a vacation.

The best investing alternatives are ultra short-term funds and liquid funds. 

Mid-term objectives are those that you have set for yourself and that you need to accomplish in the next three to five years, such a down payment on a home.

Top investing choices: ELSS, PSU Debt Funds, Hybrid Funds, and Short-Term Debt Funds such as Banking

Long-term objectives are those with a least 5-year timeline, such as milestone events like retirement, a child's schooling, or a couple's marriage.

Large Cap Funds, NPS (just for retirement), and Multi Cap Funds are the best investing alternatives.

Number 3: Safety net for money

In order to make our financial objectives come true, we may weave together a number of fantasies. However, if we don't provide them with a safety net, the same might become a burden. Insurance is that safety net. 

We all need one of four types of insurance. Additionally, they are: 

Term insurance is a kind of life insurance that makes sure your dependents or family won't face financial difficulties in the event of your early death. The sum insured on a term insurance policy is more than the premium amount when compared to other health insurance products. If you do the calculations right, the amount guaranteed will cover your household's daily costs, your spouse's retirement corpus, your obligations (such as your home loan), and your children's schooling.

Insurance for critical illnesses and health:

Having health insurance guarantees that in the event that you or any family members get sick, you won't have to pay out of cash. All medical expenditures for the insured, including hospital stays, prescription drugs, pre- and post-hospitalization fees, are covered by health insurance.In the meantime, you have the option to add essential insurance to your standard health coverage. The insurance provider will pay you the full amount guaranteed if you are found to have one of the serious conditions listed in your policy.

Insurance for mortgage protection: If you pass away while your mortgage is still in effect, your insurance will pay off your balance. It guarantees that, should you pass away too soon, your family won't be responsible for paying back the loan or mortgage on your house, vehicle, property, etc.

Personal accident insurance: In the event of an accident, the insurance provider will pay the agreed-upon amount to cover medical costs and lost wages, should you sustain significant injuries or become partly or completely incapacitated. In the meantime, your family will get the lump sum payment if you pass away during the accident. However, the amount that must be paid depends on how serious the accident was. 

Number 4: Savings on taxes

Even though we must pay taxes according to tax slabs, we may somewhat lower our taxable income by making the appropriate investments or purchases. Actually, there are up to 70 different deductions and exemptions that we may use to lower our taxable income. 

The two most often used sections for tax deductions are as follows: 

Section 80C: Section 80C is the largest tax deduction pool. You may deduct up to Rs 1.5 lakh from your total expenses and investments under this provision. EPF, PPF, NSC, NPS, ULIPs, children's tuition fees, life insurance premiums, 5-year tax-saving FDs, ELSS, Senior Citizen tax-saving instruments, Sukanya Smriddhi Yojana, and house loan principle amount are a few of the well-known tax-saving options included in this category. 

Section 80D: You are also eligible to deduct the premiums you pay for your family's health insurance coverage from your income under this section.

In addition to these two, there are more methods to lower your taxable income; to learn more about them, see Beyond Section 80C: 10 Tax Saving Strategies.

#5: Making plans for retirement: Depending on how well you have prepared, retirement may be either a happy or unhappy time of life. It's one of the most important life phases. This also applies to financial planning. 

Retirement financial planning now involves two steps. The first step in retirement planning is saving money, and the second is making money from your assets after you're retired. 

These are the two steps, as well:

Step 1: Establishing a fund for retirement:

The two main reasons saving for retirement are longer life expectancy and income decrease. Assuming you live to be 85 years old and retire at age 60. How are you going to pay for your living during the 25 years after your retirement, when you won't be receiving a stable income? 

In addition, your post-retirement costs will be much more than they are now due to inflation, or the increase in the cost of goods and services for everyday usage. If your current monthly spending are Rs 35,000, for instance, your monthly expenses in 20 years would be Rs 80,000 if you were to keep your living standards the same.

Currently, accumulating a fund big enough to support a retirement corpus takes a lifetime. Therefore, it is best to start saving as soon as possible.

Investment options such as mutual funds, EPF, and NPS may help develop a retirement corpus.

Step 2: Creating income in retirement:

 While it's critical to make sure you are saving enough for your retirement during your working years, it's just as crucial to make sure you use that corpus wisely once you're retired. Investing wisely will guarantee a consistent income for the duration of your life.

Retirement income-generating investment alternatives include life insurance annuities, rental income, and STP withdrawals or transfers from mutual funds. 

In summary

We presume that two things are more difficult than reaching Nirvana: managing your money and being able to make decisions in life without concern about money. But having every element of a comprehensive financial picture in one frame guarantees that your future finances will be flawless!