Best Financial Strategies for Personal Finance
Created on 22 Mar 2021
Wraps up in 5 Min
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Updated on 24 Aug 2022
Did you know that the unemployment rate rose to a whopping 20% during Covid-19? This massive unemployment made migrants return to their villages. Also, the employed folks had a tough time managing their finances. Had they known about personal Finance, probably they could have sailed through the storm smoothly.
Personal Finance means managing the finances at the individual level. It helps in maintaining the financial discipline needed to fulfil your financial goals. It also helps in deciding which investment avenues to choose for which of your objectives.
Best strategies to manage your finances
Financial planning is understanding your financial goals which includes both short-term as well as long-term goals. Financial Planning gives a whole new approach to your budget and tell about improving control over your financial lifestyle & helps you to manage your personal finances well.
In this article, we'll discuss the strategies which you can follow to manage your finances.
Maintaining an Emergency Fund
As the name suggests, an emergency fund is a fund that acts as a lifesaver jacket in case of an emergency. It is the readily available source of liquid assets that can be used to battle financial problems.
Risk can be minimized, but cannot be eliminated altogether. Hence, an emergency fund has become a necessity to reduce the impact of undesirable financial situations. The average time taken by a job-seeker to find a new job is three months. Therefore, it is advisable to have at least a little more than 3 to 5 months' expenses as your emergency fund.
Your fund should be able to generate adequate returns, to avoid being eaten away by inflation. At the same time, it should be immediately accessible to overcome an emergency. Hence, the funds should be properly allocated into a savings account, Bank FDs, and liquid mutual funds to ensure that it generates decent returns without compromising its liquidity.
It is recommended to save an adequate amount of your income to build the emergency fund. What's more, you can save up to Rs. 45,000 taxes annually by investing. We can use the tax saved to build our emergency fund. It will reduce the burden of savings on the emergency fund.
Keeping your Health Insured
It is aptly said, "Health is Wealth." In 2020, people realized how important their health is. The doctors came to emerge as superheroes. Hospital bills are surging day-by-day. So it has become necessary to keep your health insured. It will help in minimizing the impact of sudden medical emergencies such as chronic diseases or accidents.
Health insurance ensures financial stability during emergencies. Besides that, you can also get a tax benefit of up to Rs 20000. Why give your hard-earned money to the government when you can use it to fulfil your goals? Some health insurance policies also offer a no-claim bonus, i.e., they return a part of your premium if you don't file a claim.
Besides these benefits, it also reduces the stress at the time of emergencies and gives peace of mind. That is why it should be included in your portfolio.
What is the use of financial planning if you are not even able to fulfil your financial goals? They can include education of your children, buying a property or a vehicle, and retirement planning. Also, luxurious marriages have become a new fad. (But thanks to Covid, which proved that simple marriages could be there as well.) Besides these goals, you may have desires of your own.
To fulfil them, you must have adequate finances. 50/30/20 Rule is an easy and effective way to solve your financial problems. It emphasizes on the proper allocation of your monthly income towards different components. It states the upper ceiling for needs, wants, and savings, which are 50%, 30%, and 20% of your net income, sequentially.
To apply it, make a budget of your income and expenses and analyze it. Merely saving money won't solve the issue. Therefore, it is necessary to create a proper investment portfolio to beat inflation. The best investment to get high returns is in the stock market. However, if you don't know about it, go for Mutual Funds. You can also earn passive income to increase your overall earnings. It can avoid sacrificing your wants.
Maintaining Term Plan
Keeping your health insured is essential to avoid financial stress during emergencies. But have you ever thought about an even worse situation like a sudden demise? Although a person's life is priceless, it is better to secure your future in the event of death. It would be worse if the person was the sole bread-winner of the family. To avoid such a situation, a term plan is a good option.
A term plan is a type of life insurance policy for a fixed time period. If the insured dies before the policy expires, the sum assured will be paid to the nominees. In any other case, there will be no payment. But won't you be happy that your loved ones are safe and sound?
These policies are relatively cheaper than permanent life insurance, as they are for a fixed period and usually mature before 60 years. The premium depends on certain factors like age, health, and lifestyle of the policyholder. E.g., a chain-smoker will have to pay more premiums due to the increased risk of his death.
Some people consider the term plan to be at least ten times your annual income. It is better to consider 20 times your yearly expenses and add outstanding loans. It is suitable for people having high income but lesser expenditure. Although these policies help reduce risk, they shouldn't be categorized as an investment, as they don't give returns and are only used to secure the dependents.
Personal Finance helps in managing our finances to achieve our objectives. The best strategy is building an emergency fund. It is a reliable investment that can be used in case of emergency. It should be about 3 to 5 months of expenses. It should be able to generate good returns, besides being liquid.
Besides keeping an emergency fund, one should also secure his health. It ensures financial stability, promotes tax-saving, and helps in tackling the alarming medical expenditure. A term plan is also a good way to secure your life. They are relatively cheaper. The premium is determined by the insurance company. But, it shouldn't be confused with investment.
Remember to be wiser with your money; otherwise, you may end up becoming a miser!
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