Introduction
Before we start, we all can agree on one thing that these concepts must have been thought to everyone during school learning. Nevertheless let’s start now
Personal Finance, basically means managing his/her own money or family money by an individual to build wealth.
Before we understand personal finance more deeper, Let’s first see what all topics we are about to cover in this blog.
Terms relating to Budgeting:
A. Fixed monthly expenses:
Fixed monthly expenses include recurring costs that remain relatively stable from month to month, such as rent or mortgage payments, utility bills, and insurance premiums. For instance, let’s say your fixed monthly expenses amount to $1,500. Budgeting for these expenses allows you to allocate a specific portion of your income to cover them.
B. Variable monthly expenses:
Variable monthly expenses refer to costs that fluctuate from month to month, such as groceries, dining out, entertainment, and transportation. By tracking and budgeting for these expenses, you can gain better control over your spending and identify areas where you can make adjustments to save money.
C. EMIs (Equated Monthly Installments):
EMIs are monthly payments made towards repaying a loan, such as a car loan or a personal loan. For example, if you take out a $10,000 personal loan with a 5% interest rate and a 3-year term, your monthly EMI would be approximately $299. Understanding EMIs helps you plan your budget and manage your debt obligations effectively.
Terms relating to Insurance:
A. Life Insurance:
Life insurance provides a financial safety net for your loved ones in the event of your death. For example, if you are the primary breadwinner of your family, a life insurance policy can provide a lump sum payout to your beneficiaries, ensuring their financial stability.
B.Health insurance:
Health insurance helps cover medical expenses and provides access to quality healthcare. It protects you from significant financial burdens in case of unexpected illnesses or injuries. For instance, having health insurance can help offset the costs of hospitalization, medications, and surgeries.
C. Term Insurance:
Term insurance offers pure life insurance coverage for a specific term, usually a fixed number of years. It provides a higher coverage amount at a lower premium compared to other life insurance types. For example, a term insurance policy of $500,000 for 20 years would ensure that your beneficiaries receive the coverage amount if you pass away during the term.
Terms relating to Loans:
A. Personal Loan:
A personal loan is an unsecured loan that you can use for various purposes, such as debt consolidation, home improvements, or funding a major purchase. It is important to carefully consider the interest rates and repayment terms associated with personal loans to ensure you can comfortably manage the monthly repayments.
B. Home Loan:
A home loan, also known as a mortgage, is a loan specifically used to purchase a property. It typically has a longer tenure and involves collateral (the property itself) as security for the loan. Understanding home loan interest rates, down payments, and repayment options is crucial when planning to buy a home.
C. Credit Score:
A credit score is a numerical representation of your creditworthiness. Lenders use it to assess your ability to repay loans and determine the interest rates and terms they offer you. For example, a higher credit score indicates a lower risk profile, leading to better loan terms and lower interest rates.
D. Collateral:
Collateral is an asset that a borrower pledges as security for a loan. If the borrower defaults on the loan, the lender can seize the collateral to recover the funds. For instance, when obtaining a car loan, the vehicle itself may serve as collateral.
Terms Relating to Saving:
A. Liquidity:
Liquidity refers to the ease and speed at which an asset can be converted into cash without significant loss of value. Cash or savings accounts are highly liquid assets since they can be readily accessed. Understanding liquidity helps you maintain a financial safety net for emergencies.
B. Emergency Fund:
An emergency fund is a dedicated savings account that serves as a financial cushion for unexpected expenses like medical emergencies or job loss. Financial experts recommend saving three to six months’ worth of living expenses in an emergency fund to handle unforeseen circumstances.
C. Fixed Deposits:
Fixed deposits, also known as term deposits, are investment vehicles where you deposit a fixed sum of money with a bank or financial institution for a specific period at a predetermined interest rate. Fixed deposits offer a relatively secure investment option with guaranteed returns upon maturity.
D. Social Security:
Social Security (country-wise): Social security programs vary from country to country but generally provide benefits such as retirement pensions, disability income, and healthcare coverage. Understanding your country’s social security system ensures you can make informed decisions about retirement planning and other benefits.
E. Retirement:
Retirement planning involves saving and investing to build a financial cushion that will support you during your retirement years. It is essential to estimate your future retirement expenses and determine how much you need to save and invest to achieve your desired retirement lifestyle.
Terms Relating to Investment:
A. Digital Assets:
Digital assets, such as cryptocurrencies like Bitcoin or Ethereum, are digital representations of value. Understanding digital assets and their potential risks and rewards can help you make informed investment decisions in this evolving asset class.
B. Mutual Fund:
A mutual fund pools money from multiple investors to invest in a diversified portfolio of securities, such as stocks, bonds, or a combination of both. Understanding the different types of mutual funds, their investment objectives, and risk profiles can help you choose funds that align with your financial goals.
C. Real Estate: :
Investing in real estate involves purchasing properties with the expectation of generating income or capital appreciation. Real estate can provide a stable income stream and serve as a long-term investment. Understanding real estate market trends, financing options, and rental yields is crucial for successful real estate investing.
D. Gold:
Gold is often considered a safe-haven asset and a hedge against inflation. Investors can buy gold in various forms, such as physical gold, gold ETFs (Exchange-Traded Funds), or gold mining stocks. Understanding the factors that influence the price of gold and its role in a diversified investment portfolio is important.
Terms Relating to Advanced Finance:
A. Asset Allocation:
Asset allocation is the process of distributing investments across different asset classes, such as stocks, bonds, and cash, to achieve a balance between risk and reward. Understanding asset allocation helps optimize investment portfolios based on individual risk tolerance and financial goals.
B. Diversification:
Diversification involves spreading investments across different assets, sectors, and geographic regions to reduce risk. By diversifying investments, investors can mitigate the impact of negative events on their overall portfolio performance.
C. Risk tolerance
Risk tolerance refers to an individual’s willingness to take on investment risk. It is influenced by factors such as financial goals, time horizon, and personal comfort with market fluctuations. Understanding your risk tolerance helps align investments with your risk appetite.
D. Compound Interest:
Compound interest is the interest calculated on the initial principal amount as well as the accumulated interest from previous periods. It allows investments to grow exponentially over time. Understanding compound interest is vital for long-term investment planning and wealth accumulation.
Terms Relating to Credit Cards:
A.Minimum Due: :
The minimum due is the minimum payment required by the credit card issuer to keep your account in good standing. It is typically a small percentage of the total outstanding balance. Paying only the minimum due can result in accumulating high-interest debt and extending the repayment period.
B. Due Date:
The due date is the deadline by which you must make the payment to the credit card issuer to avoid late fees and penalties. It is important to pay your credit card bill on time to maintain a good payment history and avoid negative impacts on your credit score.
C. Cashback
Cashback is a rewards program offered by some credit cards, where cardholders can earn a percentage of their purchases as a cash rebate. For example, a credit card may offer 1% cashback on all purchases, meaning you receive $1 back for every $100 spent. Cashback rewards can be redeemed as statement credits, direct deposits, or other options specified by the credit card issuer.
D. Rewards
Rewards points are a form of loyalty program offered by credit card issuers. Cardholders earn points for every dollar spent using their credit card. These points can be redeemed for various rewards, such as travel, merchandise, gift cards, or even cashback. Different credit cards may have different rewards programs and redemption options.
Terms Relating to Wealth:
A. Assets
Assets are resources or properties that have value and can be owned or controlled by individuals or entities. Examples of assets include cash, investments, real estate, and personal possessions like vehicles and jewelry.
B. Liabilities:
Liabilities are financial obligations or debts that an individual or entity owes to others. Examples of liabilities include loans, credit card balances, mortgages, and outstanding bills.
C. Net Worth:
Net worth is the difference between an individual’s assets and liabilities. It represents the individual’s overall financial position and can be used as a measure of wealth. A positive net worth indicates that assets exceed liabilities, while a negative net worth indicates the opposite.
5 Rules of Basic Finance
100 – Age Rule: Subtract your age from 100 to determine the percentage of your portfolio that should be allocated to stocks. The remaining percentage can be allocated to bonds or other investments.
50-30-20 Rule: Allocate 50% of your income towards essential expenses, 30% towards discretionary spending, and 20% towards savings and investments.
% of EMI Rule: Limit your total monthly loan EMIs (Equated Monthly Installments) to a percentage of your monthly income, typically around 30% to 40%.
10-5-3 Rule: Aim to save at least 10% of your income, have an emergency fund equal to 5-6 months of living expenses, and limit your consumer debt (excluding mortgage) to no more than 3% of your income.
Rule of 75%: Aim to replace 75% of your pre-retirement income during retirement to maintain a similar standard of living.
Steps Involved in Any Basic Finance Planning
Define Financial Goal and Vision: Determine your financial goals and establish a clear vision of what you want to achieve in terms of your personal finances.
Find Out Options: Explore different financial options and strategies that align with your goals. This may include investment vehicles, savings accounts, insurance plans, and more.
Structure: Develop a structured plan to achieve your financial goals. This may involve setting timelines, budgeting, saving, and investing in a disciplined manner.
Automate: Automate your finances as much as possible. Set up automatic transfers to savings and investment accounts, and automate bill payments to ensure timely payments and avoid late fees.
Practical Next Steps After Basic Finance:
Once you have a good understanding of basic finance, you can consider expanding your knowledge and taking practical steps to further improve your financial well-being. Some practical next steps include:
Advanced Investing: Learn about advanced investment strategies, such as value investing, dividend investing, or options trading, to potentially enhance your investment returns.
Estate Planning: Familiarize yourself with estate planning concepts, including wills, trusts, and power of attorney. Ensure your assets are protected and your wishes are documented.
Tax Planning: Understand the tax implications of different financial decisions and explore tax planning strategies to optimize your tax situation.
Retirement Planning: Dive deeper into retirement planning by exploring retirement income strategies, Social Security optimization, and healthcare considerations.
How Can I Learn More about Basic Finance?
Podcasts: Listen to finance-focused podcasts that cover a wide range of topics, from personal finance strategies to investment insights.
Books: Read books written by finance experts that provide comprehensive information and guidance on personal finance, investing, and wealth management.
Joining Communities: Engage with online communities or forums dedicated to personal finance. Participate in discussions, ask questions, and learn from the experiences of others.
Networking: Connect with professionals or individuals knowledgeable about finance. Attend networking events or join professional organizations to expand your network and gain insights from industry experts.
Conclusion:
Basic finance is essential for everyone to understand and manage their personal finances effectively. By familiarizing yourself with basic finance terms, principles, and concepts, you can make informed decisions about budgeting, saving, investing, and protecting your financial well-being. Continuously educate yourself, seek professional advice when needed, and take practical steps to secure your financial future.