What is Personal Finance? Importance

Meet 30-year old Subash. He has a stable job, he earns a decent amount each month and he knows how to manage that money. His father recently retired, after giving over 40 years to the same company. Now over 60 years of age, Subash’s father is generally content – except for one thing. He has always wanted to own a car, but he simply couldn’t save up enough to make that big purchase.

With an income of around Rs. 50,000 each month and monthly household expenses coming up to Rs. 40,000, Subash’s father had managed to meet the needs and wants of his family. But he’d never succeeded in ticking that one premium buy off his list. Knowing this, Subash recently decided to surprise his father. As a retirement present, he bought the car his father always wanted to own.

Both shocked and surprised in equal measure, Subash’s father had only one question. Most likely, it’s also the same question you have. How did Subash manage to tick off a premium purchase by the age 30 when his father couldn’t afford to get to it over the course of a 40-year career?

The answer is simple. Subash’s father merely saved his money. Subash, meanwhile, invested it. Saving merely helps preserve the capital. But investing helps it grow. And this is where personal finance comes into the picture. It’s more than merely earning, spending and saving what’s remaining. It helps you make and adhere to financial plans that are perfectly suited for your individual life goals. 

In this module, we’ll cover all the key bases related to personal finance and learn about how financial plans can help you grow your money. Come, let’s delve a little deeper and answer some important questions like what personal finance is and why personal finance is important.

What is personal finance?

In the simplest terms, personal finance is the art of managing your finances effectively. It involves preparing a budget, making financial plans, saving, spending prudently and above all, investing smartly. At first glance, it seems like an easy enough task, doesn’t it? But when you scratch the surface and delve a little deeper, you’ll see that personal finance is not something you learn overnight. It takes commitment, dedication and a lot of conscious effort to cultivate good personal finance practices.

On a personal level, personal finance ensures that your money is spent and invested in the best possible manner. But to get to that point, you need to be aware of the many elements involved in personal finance. It’s more than merely spending and saving. Take the case of Subash’s father from our little anecdote earlier. He was no doubt good at saving up enough to meet his family’s needs. But is that the end of the road?

Clearly, no. As Subash went on to show us, there’s a lot more to personal finance than saving up what’s left over after your monthly expenses have been met. These additional aspects are what we’ll extensively look at in this module. They include assessing your goals, your tolerance for investment risk, and your expectations for the future.

Before we get there, let’s address an important question – Why is personal finance important? What makes it essential for individuals like you?

Why is personal finance important?

The need for personal finance is multifaceted. Depending on each individual’s case, personal finance can offer a variety of benefits. For some people, it makes money management easier. For others, it streamlines their investments and financial plans. Let’s take a look at the broad reasons behind why personal finance is so important.

It helps you understand your finances better

Taking charge of your money issues begins when you understand your finances better. You need to get some basic questions sorted. 

• What’s your monthly budget like?
• How much of your money do you spend on luxury products and services?
• And how much is spent on the things you really need?
• What are your future requirements like?

These are just some of the things that personal finance requires you to look at. And by doing this, you get a better idea of how much you earn, spend and save. By extension, you also start understanding your finances better. This lays the foundation for any and all financial plans that you’ll make in the future. 

It enables you to plan your investments

When you consciously keep track of your finances, it becomes easier to plan your investments. Subash from our earlier anecdote is an excellent role model for this. From the time he earned his first paycheck at 24, he has been consistently investing his money. That was only possible because he came up with some financial plans that streamlined his investments. With clear goals in sight – both for the long term and the short term – you too can invest smartly, thanks to personal finance.

It keeps you from taking on unmanageable debts

EMI culture can be quite inviting, particularly because it fuels the ­­‘buy now, pay later’ attitude. Often, these debts can be easily managed, particularly if you have a steady stream of income to fall back on. However, some people tend to go overboard and take on huge debts that become unmanageable eventually. And the burden of debt is a huge weight to bear.

But when you take charge of your finances, you can steer clear of debts that you know you won’t be able to repay. This is one of the big upsides of making financial plans and tracking your personal finances.

It allows your money and assets to grow

Personal finance takes you one step further than merely saving up for your needs. It helps your money multiply by allowing you to choose the right investment options. In other words, personal finance is essential because it helps you create wealth, so your future is financially secure. With the right kind of financial plans backing you up, you can retire comfortably and fulfil your dreams and goals for the future.

To truly master the art of personal finance, you need to be aware of the tried and tested personal finance strategies and principles out there. Let’s take a closer look at some efficient strategies to master personal finance.

Personal finance strategies

A set of best practices can help you get better at anything, right? And personal finance is no different. Here’s a list of some such techniques that you can practice.

• Prepare a budget and understand where your money is going. The 50-30-20 rule works excellently here.
• Reduce your debts or pay them off entirely, if you can. This will leave you with more money to invest.
• Make use of tax benefits as much as possible. Otherwise, most of your gains or earnings may be eroded by taxes.
• Ensure that you are prepared for emergencies. Create an emergency fund that is equal to at least six months of your regular income.
• Invest as early as possible in life. The earlier you invest, the more your money can grow over the years.

Personal finance principles

It is also very important to understand the key principles that drive personal finance. We’ve identified three main areas that you need to be aware of, in this context. 

• Prioritization
  You need to prioritize the areas that bring in the money, and ensure that you sustain those income streams.
• Assessment
  You also need to constantly and periodically assess your earning and spending habits, so your income streams are optimized and your expenses are minimized.
• Restraint
  Restraint ensures that you don’t spend more than you make. In this age, when credit is so easily available, restraint is of utmost importance.

Wrapping up

So, now you know the answer to the question - Why is personal finance important? Eager to get started with this excellent personal habit? Then the coming chapters are just what you need. Keep reading to understand the various aspects of personal finance, like taxes, insurance, investments and more.

A quick recap

• In the simplest terms, personal finance is the art of managing your finances effectively. 
• It involves preparing a budget, making financial plans, saving, spending prudently and above all, investing smartly.
• On a personal level, personal finance ensures that your money is spent and invested in the best possible manner.
• The need for personal finance is multifaceted. Depending on each individual’s case, personal finance can offer a variety of benefits.
• It helps you understand your finances better.
• It enables you to plan your investments.
• It keeps you from taking on unmanageable debts.
• It allows your money and assets to grow.