Personal Finance For Beginners: High school and college might give you a degree to get a job, but despite this, there is still a void when it comes to personal finance. Unless you proactively pursue a degree in finance and investments, many basic money management lessons are not taught in schools and colleges.
This results in a huge number of people who don’t know how to manage their own finances, maintain a credit score, avoid interest payments, etc. These are the most simple tips that every person, young and old should learn at the earliest.
Lucky for you fellow Finvestors, we’re here to help! Today we’re going to give you a few personal finance for beginners tips to get you started and maybe even save some money along the way. Read on to find out.
Why is Personal Finance Important?
1. Grow your Wealth
When you save money regularly in a savings account, your money accumulates slowly. This pace is not enough to retire because –
A) Inflation is reducing the value of your money every year and
B) Cost of living rises over time.
The two are put together to create a double negative against your savings. You need to have your money grow for you instead of sitting idle in savings.
2. Have an Emergency Fund
An emergency fund is a life-saver i.e. If you have it. Emergencies are unpredictable. It can happen anytime to anyone, and during those times, you’ll need funds. Short of dipping into your savings or taking loans, there are no better alternatives to having an emergency fund.
Ideally, we wouldn’t want to be in such a situation, but it makes you feel safer if you have some money kept aside for emergencies. Whatever your income, you need to set aside a certain amount for emergencies.
3. Create Passive Income Streams
A majority of the working population depends on one source of income – wages or salaries. A secondary source of income could potentially cover your living expenses over time. Learning how to manage your money could help you and your family achieve financial independence efficiently.
4. Prepare for Retirement
When you’re young and making money, it is easy to lose yourself in the moment. Spending money frivolously means lesser money to invest and even lesser to retire with. You need to realize that eventually, your capacity to work will scale down and by then you need to have savings to rely on for that part of your life. While talking about retirement, you need to understand the power of compounding.
The earlier you begin investing your money, the lesser corpus you have to invest into the principal amount every month. Small regular amounts of money invested over a long period of time give you a comfortable payout by the time you retire.
How to Manage Your Money?
This is nothing short of a Million Dollar Question because it can potentially save you millions, if not more. In the sections below, you can learn more about different money management techniques and tips.
Based on your lifestyle, your monthly expense comes up to a certain amount. These expenses include rent, groceries, shopping, travel, etc. Budgeting helps you allocate a fixed amount of money for this expense so that at the end of the month you have a clearer idea about your spending.
Budgeting means living within your means. When you have a credit card with a limit that is 2 or 3 times your monthly income, most people are almost always tempted to spend it all. This eventually leads to debt which slows down your financial goals for the future.
2. Credit Score
At some point in our lives, we all take out a loan for an important purchase. It could be for a Master’s degree, a wedding, a car, or a house. These are expensive investments that take decades to purchase if one were to depend completely on savings and salaries alone.
The alternative is to take a loan. Banks offer loans for all the above assets and more. But, how does the bank know if a borrower can repay the loan in due time? Especially when the payment duration spans anywhere from 7 to 30 years depending on the assets?
The Answer – Credit Score.
A credit score is a number between 300-850 that depicts a borrower’s creditworthiness. This score allows the banks to know how capable you are as a customer to return the loan amount to the bank in due time. People with better credit get lower interest rates, higher credit limits, and other perks as well.
In India, CIBIL is a common credit score that is used by many financial institutions while FICO is internationally recognized.
If used correctly, Credit cards can reap great benefits. A good credit score can give you better interest rates on your loans, and faster approval time, along with other perks and privileges from credit card companies.
3. Avoiding Debt
With a steady income, people sometimes tend to overspend. When you overspend on things you don’t need, you end up going into debt. Being in debt is a situation where your expenditure is well above your income. The majority of the time, debt is due to unmonitored spending.
Debt however is not completely evil, if used wisely it can work for you! For example – building your credit score.
However, an unnecessary debt like relentless shopping, buying depreciating assets like cars and bikes, etc. can drown you in interest payments for years. Before spending altogether, draw a clear line between your spending limit and your actual credit limit. And with this, we’ve concluded our article on personal finance for beginners.
Unlike in the past, today we have more access to information than ever before. There is no shortage of courses, webinars, and techniques to help you manage your finances. The tips mentioned above might seem simplistic but can save you a lot of time and money. Happy Investing!
To learn more about Personal Finance for beginners, check out the courses on FinGrad.
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