Personal Finance is the process of Managing and Utilizing Financial Resources which an individual has or that is being generated month on month by the individual, for the various needs of the family.
The purpose of practicing and maintaining good personal finance is to ensure that the families enjoy financial comfort / freedom with peace of mind and happiness throughout their life time. And this will be possible only if the following four pillars of personal finance are maintained in order.
4 Pillars of Personal Finance
All the 4 pillars are interdependent and play a major role in each of the individual’s financial management process. A problem on any one will reflect on the other 3 pillars causing trouble in the smooth flow of one’s financial life.
People create income through various sources and utilize them to meet the current living expenses and debt servicing. The expenses should not only include the monthly budget plan but also the future financial needs for the family that has to be fulfilled through different types of assets.
For Instance, it is not enough to plan for the current school education expenses of the children but it is also essential to plan for their future college education commitment as per the choice of the parents or children. Like this, various other bigger financial commitments like Daughter’s Wedding, Retirement Life and so on should also be planned for.
As far as the liabilities are concerned, they fall into 2 categories: long-term loan and short-term loan.
Home loan is a long-term loan being repaid with EMI without any default, whereas, Vehicle loan, Personal loan and Credit Card outstanding are some examples of short-term loans. But the credit card outstanding should be cleared month on month and should not be allowed to be carried forward because the interest charged on credit card outstanding is huge and ranges between 36% and 48% per annum.
When in cash flow stress, people liberally use their credit cards, but it should be avoided as it may pose a bigger financial stress in the months to come.
Assets will be in various forms like property, Gold, Financial assets like Insurance, Mutual Funds (Equity, Debt category), FDs, Human assets like Knowledge and skills.
For creating these assets, people need to generate surplus every month from the income after their current month expenditure and use this surplus for their future needs with suitable financial products and skill development programs. All these 4 pillars are required to be in order for a smooth lifestyle. If there is any problem or discrepancy on any one of them, it will have an impact on the other 3 and so to avoid this to happen, people need to follow some basic financial disciplines which will be shared in my next blog.