Financial education and discipline is an important component of a successful and happy life. However, even after we are grown-ups we have a vague understanding of personal finance management, unless you have undertaken professional training in this area. The primary reason behind this inadequacy is the low or no importance given to financial education in our schools and homes.
A recent survey carried out by ScripBox, an online mutual fund platform, revealed that 72% of Indians are not sure of how much to save or invest to attain financial freedom in life. 56% of respondents in the survey confessed that they lacked the knowledge and discipline to handle personal finance.
Managing personal finance is plain common sense, but you will find many who are an utter failure in this department. As a result, they are unable to save enough and invest adequately for the future.
As lockdown shuts us down in our homes, this is a good time to review the financial missteps you have taken in the past and take the right steps now to improve your personal finance during the lockdown. Here are some useful tips to help you get started, including how to take the right advantage of the EMI moratorium offered by your bank.
Create a Personal Cash Flow Statement
You can start walking towards another point in your financial life only if you know where you stand now. Therefore, it’s important to assess your current financial situation for managing personal finance. Start with evaluating your cash flow. If you are surprised or shocked looking at your bank and credit card statement every month, the best solution is to have a personal cash flow statement.
A personal cash flow statement is nothing but a record of your income(s) and expenditures. For instance, your incomes or cash inflows may include salary, interests from FD, income from rent, dividends, and capital gains from sale of stocks, bonds, etc. Your cash outflows or expenses may include rent, EMIs, utility bills, groceries, entertainment, school fees, gym fees, etc.
With a personal cash flow statement, you can determine whether you have a positive or negative cash flow. If your income is more than your expenses, you have a positive cash flow.
Create a Personal Balance Sheet
Next, you can maintain a personal balance sheet that gives you a quick and clear picture of your current net worth. Like a company balance sheet, a personal balance sheet is divided into two columns: Assets and liabilities.
The assets column will feature:
- Liquid assets or movable assets such as cash, current account, savings bank account, etc. These are assets that can be used right away without losing its value.
- Immovable assets include house, cars, furniture, artwork, etc. You must enter current market value; therefore you may need to do some research here.
- Investments in equity, bonds, fixed deposits, ULIPs, mutual funds, gold, real estate, etc.
The liabilities column will feature all the money that you owe such as personal loan, home loan, credit card outstanding, outstanding payments, pending bills, etc.
Set Aside a Portion of Your Income
After assessing your cash flow, experts recommend that you set aside 20% of your income as savings. Only invest this money after you have learnt the basics of investment such as allocation, planning, returns and financial goals. Seek professional advice if you are not sure, but don’t invest your hard-earned money based on instincts, advice from friends or pure hype. You must realize that increasing your income is only half of the battle; if you don’t save or invest adequately, you will not emerge a winner.
Use the EMI Moratorium Wisely
If we are discussing personal finance during lockdown, we can’t ignore the recent EMI moratorium allowed by banks on all term loans, including personal loans, home loans, car loans and credit card payments.
While this has been a blessing for many people grappling with low income during the lockdown, you may get into trouble if you are misusing this relaxation. Don’t avoid paying your EMIs if you can afford it, because this is not a waiver of your outstanding debt. You still have to pay interest on the outstanding amount and your loan duration will be extended.
If you have a personal loan, home loan and outstanding on two credit cards, it’s a good idea to make payment for at least 1 credit card and 1 term loan. If you don’t do so, you may be shocked to see your outstanding loan and credit card bills in June.
Create and Follow a Budget
You can only meet your savings and investing goals if you are disciplined. To inculcate discipline, you need to create and follow a budget without fail. Once you have chalked out your financial goals and investment horizon to reach that goal, you need a budget to ensure that you save enough to invest in reaching these goals. Create a budget and stick to it.
Create an Emergency Fund
One of the most valuable things in personal finance that we have learned due to the lockdown, is the importance of emergency funds. During the lockdown, people who have an emergency fund are better off than those who ignored the wisdom of having one.
Apart from the above tips in managing personal finance, follow the age-old advice of living within your means and paying debt promptly. There are few people who get rich by winning a lottery or through an inheritance. But there are many who get wealthy with a millionaire mindset that comes through proper financial education and discipline. Use this lockdown period to improve your financial education and get the right financial mindset.
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