Finance is one word which sounds difficult to understand to so many people yet it is so essential to true sense of freedom. The start of the journey of personal finance begins with jotting down the current financial objective.
By current I refer to the fact that your objective WILL differ over a period of time and a fixed objective may not serve the changed needs. The objective setting is the most important activity and need to be a very simple aim with Measurable result.
Eg I want to be comfortable money wise is not a right objective rather paying off x amount of liabilities or y amount of net worth accumulation in this year is the right one.
The right Measurable goal sets you on the path to success.
Once the goal is set, check the current situation. Following things need to be looked at
- Income from all sources – This is not taxation income so the savings bank interest income, FD interest income doesn’t count unless these are significant ones and expense decisions are made in your life basis them. It would however include rental income, income from shares if you are a regular investor, income from business etc.
- Mandatory Deductions – These would include all deductions related to loans from institutions (loans from close family members don’t count normally), society maintenance, bills, Grocery etc.
- Cash in Hand – This is the amount on which you can take decision. Many formulas go around to identify where to put this money. I follow the below one:
° 10% to Give back to society. This initially was 1-2% only and depends on your life circumstances and choices. You may also choose to skip this.
° 20% in liquid funds – FD, Liquid funds, Cash in Savings Account
0 40% in Equity – Mutual Funds are a good way to start and yield good return over a long period of time.
0 30% in pre-paying outstanding debt. If zero debt, the amount can be put in debt funds.
More than any percentage it is important to plan and consistency in following the plan.
Over a period of time, this leads to a disproportionately better financial health than someone who just invests and definitely better than the one with no investments.