It is an activity involving an individual&rsquo;s family financial decisions such as budgeting, saving, insurance, loan repayment, investing etc. Personal finance has a significant influence on how your financial life turns out. You could be the prime earner in a family with spouse, parents and children or you could be one of the earning members in the same family where your father may be earning a pension and your spouse is also employed.

What is personal finance?

It is what you earn; the source of cash inflow that you receive and then use to support yourself and your family. You could be earning income from employment or by way interest from money in the bank. Common income source includes; salaries, bonuses, wages, pension, interest or dividends. However, money into your account by way of sale of a car will not count for income because you would have already paid for the car from income earned.

Income tax in India treats income under 5 different heads. These are: income from salary (including pension), income from house property (rent), income from capital gains (sale of capital asset such as mutual funds, shares, house), income from business and profession (self employed, lawyers, agents, privately practicing doctors etc) and income from other sources (interest from bank savings and deposits, lottery winnings). Income is the stepping stone to your personal finances, without it you will not be able to save and invest.

What’s income?

The money that you set aside for future use is savings. It is also expressed as the money that you are left with from income after accounting for expenses or spending. Simply put; savings is income minus expenses. You keep savings aside and use it to invest money for it to grow in its value. There are many advantages to saving money, especially the way it can come handy to meet future financial needs and goals.

What’s savings?

It is the process of planning every aspect of your personal finances, which includes budgeting your expenses, investing in the right assets based on your risk profile, borrowing, covering you against financial risks, setting financial goals, creating financial plans and managing your income tax and more. Think of it as a roadmap that enables you to meet your life&rsquo;s expected as well as unexpected expenses.

What’s financial planning?

We all know that life is full of risks. But, you can try to avoid them or reduce their occurrence and its consequences. However, you cannot completely eliminate them. There is provision to share risks by paying someone, which is what insurance is all about. Insurance of any form is actually shifting risk to another party, known as the insurer who assumes the risk and its consequences for a cost.&nbsp; Insurance can be purchased for your life, health, property and many other things and what you pay to the insurer is known as premium.

Risk management is the process of deciding what and how much to insure and knowing the costs of loss that you would incur in the absence of insurance. Based on these factors, you may wish to insure fully or partly, by taking on some of the risks to yourself or by avoiding certain risks. For instance, in case of home insurance, by adding security systems to your house, you may be able to reduce the cost of insurance against theft.

Risk management with insurance 

Everyone&rsquo;s personal finances are unique. Yet, chances are that the financial aspirations of people are somewhat similar &ndash; everyone wants a house, a car, a vacation, fund for their retirement and so on. A financial goal is akin to a target, a desire for what you want money for or what you wish your money to do for you. You could start by listing all your future financial goals to know all that you aspire for and it involves saving, spending, borrowing, earning or investing.

Financial goal setting goes beyond listing goals. Time frame and an amount for each financial goal are two important factors when setting financial goals. With measurable and clearly defined goals, it will be easier to commit a regular sum to realise the financial goal and also monitor the progress made by the investments towards the goal. By setting financial goals, you can set on a realistic path to achieve your financial goals. For instance, instead of listing the financial goal to buy a car, you need to detail it like buying a car two years from now which costs Rs 6 lakh. Setting financial goals also helps you imbibe good financial habits.

What are financial goals and how to set them?

By setting financial goals, you can set on a realistic path to achieve your financial goals. Setting financial goals also helps you imbibe good financial habits. Time frame and an amount for each financial goal are two important factors when setting financial goals. With measurable and clearly defined goals, it will be easier to commit a regular sum to realise the financial goal and also monitor the progress made by the investments towards the goal.

Setting financial goals

There are several ways to classify financial goals; it could be based on the value of the goal, the time frame to reach each goal, or even the priority of the goal. Some financial goals could also be put under the non negotiable category. For instance, while you may delay the financial goal to travel, you do not have such a liberty when you are planning for your child&rsquo;s education. Most often financial goals are bucketed into short-, medium- and long-term based on the time frame needed to reach the financial goals that you have. However, there are financial goals, which could also be habits that you wish to form such as, increase your savings, reduce your debts and so on.

 Types of financial goals

Think of goals that you wish to reach over the next one year and they would be short-term in nature. Goals such as upgrading a TV or household repair or building an emergency fund, which are planned capital expenditure, can be termed short-term financial goals. Funds necessary to reach short-term goals are generally easily available in the savings bank or by way of easy credit, because one doesn&rsquo;t wish to face swings in the value of savings due to say stock market volatility, if the money for such a goal was invested in equities.

Short term goals

These are goals that you would like to achieve over the next 3-5 years and hence medium-term in nature. It could include goals such as a vacation or a planner upgrade/purchase of a vehicle and so on. Many individuals use this period to build a small corpus which could act like a down payment for their financial goal to buy a house. Typically money for such goals is in a mix of equity and debt investments, such that the portfolio volatility is low. A smart way is to taper down the investment for such goals from a higher equity allocation as the goal approaches. For instance, if you had 70% equity allocation for a goal which is 4 years from now, by the time you approach year 4, you should reduce your equity exposure up to 20%, depending on your risk taking ability.

Personal Finance Basics

What is personal finance?