Beginner’s Guide to Personal Finance
We all talk about various aspects of personal finance. But, personal finance can get a little confusing and overwhelming, especially if you are a beginner. Since we are not specifically taught about personal finance in schools and colleges, beginner’s guide to personal finance is necessary. You may be busy with your work, but you need to manage your personal finances for the better. Even if you are working with a Financial Advisor, you need to be aware of the basics.
We would like to introduce the four pillars in one’s financial life as beginner’s guide to personal finance. These are as follows:
- Income
- Expenses
- Assets
- Liabilities/loans
But, why are these considered as four pillars of your financial life? Think of a building. There are structural beams on which a building is constructed. The building will fall off if the structural beams (foundation) are not strong enough. Personally, your financial life rests on four pillars of personal finance. The above mentioned aspects hold up your financial structure. If your personal financial foundation is solid, you can enjoy your journey towards financial well-being.
As Beginner’s Guide to Personal Finance, you need to focus on each of your personal financial pillars
As Certified Financial Planner in Kolkata, we understand that everyone’s personal finances are going to look somewhat different, but these very basic principles will apply to everyone. Each pillar is unique. Each one of them plays a critical part in getting your financial situation in order. As a beginner’s guide to personal finance, they must be focused on collectively.
Pillar #1 is Income
Income refers to what you earn during your working phase of life. You need to have career goals. You need to realize your earning potential. Constantly upgrading your knowledge and skill in your relevant field of work empowers you to achieve desirable income growth.
Self-introspection is the key. Here’s a starting point.
- Are you getting a promotion every 2-3 years?
- Are you learning new skills regularly?
- Are you getting above-average pay raises?
Your income sets the tone of your financial life-journey.
Pillar #2 is Expenses
By expenses, we mean your family expenses. As practicing Investment Advisor in Kolkata, we have observed that initially clients do not know how much they spend out of what they earn. If you can say how much you earn, isn’t it a need to know how much you spend every month?
Family expenses include both fixed monthly expenses, variable and discretionary expenses as well.
Pillar #3 is Assets
Assets are anything you can convert into money. Assets may be classified into two sections. One is your personal assets. Another one is your investment assets.
Examples of personal assets are residential property, car, jewellery, etc.
Investment assets are those assets from where you can generate income at present or in the future. Investment assets can be either in the form of fixed assets or financial assets.
Pillar #4 is Liabilities/loans
Liabilities are what you owe.
Liabilities may be in the form of mortgage, credit card bills, student loan, car loan, personal loan, etc.
Here are some other questions you need to ask yourself when inspecting your own debt pillar:
- How much debt do you currently have?
- What types of debt do you have?
- What is your debt to income ratio?
- What is your plan to paying it all back?
- Are you paying your bills on time?
- Do you have plans to take any loan? Why?
Balance these four pillars: Beginner’s guide to personal finance
Maintaining a balance between the four personal financial pillars of life is indispensable.
Financial stability is not solely dependent on one’s income level. You need to have a budget. Strictly following the budget is challenging for many families. Financial planning processes include family cash flow planning and the means to follow the family budget prudently.
As Financial Advisor in Kolkata, we urge clients to find a reasonable and comfortable lifestyle given their capacity to earn. There are many high-income families who could accumulate less wealth than families in middle income segment. This is simply because families who know how to live within their means are in a better position to achieve financial stability.
You need to see if you are channelizing your savings into investments.
Before taking any investment decisions, you need to consider various aspects starting from purpose of such investment, diversity of existing assets, risk associated with investment, own risk profile, liquidity requirements and preferences, macroeconomic scenario, personal factors, etc.
Assets are one of the two inputs to derive your net worth. Second input is your liabilities.
That’s why, as Financial Consultant in Kolkata, we believe, when it comes to your finances, all of the pillars constantly need to be inspected in order to gauge the integrity of your financial life.
Financial planning tools and processes are designed to address your financial commitments/responsibilities and other specific financial concerns. Structured approach enable you focus on relevant personal financial aspects and ultimately gives you peace of mind.
