Personal Finance for Smart People
If you think personal finance is very tough and tedious, congrats you are among the 95% of the total crowd. Maintaining documents, screening good financial products, and reviewing them really makes your life hard.
But what if we tell you this article can make your life a lot easier and smarter. What if you can get smarter by doing only these 6 steps. Yeah! You absolutely heard it right. You are just 6 steps away from attaining your financial freedom.
Often people think wealth comes only with complex knowledge or strategies. However, it is not true at all. The majority of them lose when it gets complex. Great investors who have built an enormous amount of wealth kept it simple. Keeping it simple is the only relevant skill you should possess in this chaotic world.
Now, follow these 6 steps if you really want to secure your financial future. We want you to focus completely until the end. Full Concentration. Period.
Did you know the GDP of India just contracted by 23.9%?
We were just testing your concentration, and if you clicked on the link you already lost.
Didn’t we say that you need to give undivided time and not let noise muddle your focus?
Personal finance requires focus, don’t lose it before you have already started.
Before doing anything, you should first build an
1) Emergency fund: Making your bed for a goodnight sleep
You guys are so boring, why would I need an emergency fund? This might sound too boring but trust us this is the first thing one should build. It’s like the cushion, keeping your bones safe from breaking when you fall. And COVID-19 has made its relevance even more.
Just think of someone who was living on paycheck-to-paycheck, no savings, lost his job during COVID, and had a few EMI’s to pay. This is definitely a life you wouldn’t want. Right?
So you need an emergency fund to keep you afloat during dark times. Unless and until you have truckloads of cash with you.
And if you are thinking about how much amount do you need in an emergency fund.
Here’s the way to think about it.
If your monthly expenses are Rs.30000, then having an emergency fund of Rs. (30000 X 7months)= Rs. 210,000. This is not a fixed formula, if you are more risk-averse or prudent you could take it to even 12 months.
A fund that can meet your expenses for 6-12 months should be your safe heaven which would suffice your expenses and keep you afloat if you lose your job. So, now you have a buffer time of 6-12 months to find a new job.
So, before anything else create an emergency fund in the form of a fixed deposit which can be liquidated when you need those funds.
2) Pay your bad loans early:
Bad loans are loans which are used to finance depreciating things. For example, Car, scooter, furniture, etc. And yeah! Even vacations. These are personal loans that come with high-interest charges which is an absolute wealth killer. You should only have these things if you can afford them in the first place. Paying these loans early can be a great stress buster. Ask someone who just completed their car EMIs.
On the other hand, you need not be in a hurry to pay off your housing loans and education loans. These loans also give you a tax benefit, thus trying to get off early doesn’t make much sense.
3) My house is on fire, I don’t have an Insurance:
Many people believe insurance is a form of investing. This is the biggest fallacy someone can believe in. Even agents, bank managers, and your next-door neighbor talks about insurance as an investment.
Insurance was never an investment tool. Insurance is just a way to insure something that has value, and in case its value gets damaged or lost, it acts as a hedging mechanism to make good those losses.
Broadly, there are two types of insurance- Life Insurance and General Insurance
And, everyone should have at least two kinds of insurance. One Life insurance and one health insurance.
Life insurance makes more sense if you have any dependents, if you don’t have any dependents than health insurance would be sufficient.
If you want to read more about health insurance. Click here.
Always keep it simple. Don’t get involved in fancy products like ULIP’s, Money Back, and Endowment Policies. Stick around the most basic form of life insurance (i.e. Term life insurance)
4) Don’t feel like paying tax, you need Tax planning
This is an interesting area and not many people know how taxes work. Taxes are quite complex if you are into business. It is always great to consult your accountant or tax consultant for this matter.
But if you are a salaried person, Congrats!! The government have made your life already easy by deducting TDS even before your salary gets credited in your account.
Even then you can make use of the 80C deduction in the Income Tax Act by buying insurance or investing in PPF. Apart from this, you can use the section 80D for medical expenses and loans for housing and education.
5) Investing: Now watch me grow grow, watch me nae nae
Oh yes!!! This is our favorite area.
And here’s a quote from Warren Buffet-
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
FYI, Buffet just turned 90 this year.
So, in order to invest and get rich, you got to have patience. Investing is like watching your plant grow. It takes time.
Have you heard about the Chinese bamboo?
Well, it’s an interesting one. The seed of the Chinese bamboo tree spends five years under the ground with no growth whatsoever but in the fifth year, it grows over 80 feet tall. The same goes for investments, you may not see any growth in the first few years but with time the compounding kicks in and the magic begins to happen.
If you don't know anything about markets or someone who has a day job to take care of, it’s best for you to choose a mutual fund. Starting off with small amounts of SIP like Rs. 2000 a month would be a great start. But going forward as your income increases from your day job or you cleared your EMIs, top up your SIPs every year. If you started with Rs. 2000 make it Rs. 2500- Rs 3000 the next year, and so on.
We have written a bunch of articles on mutual funds and investing. Do check it out here.
Golden rule: Never borrow money from anyone to invest in the stock market or equity-related product.
6) Good Ol’ Days come to an end: Retirement Planning
It doesn’t really matter how smart you are or the fat salary that you got at your first job itself. If you don’t have a retirement plan you are not thinking about your personal finance in the right way.
Accept it or not you are going to grow old and tired.
Unless you are in the league of the greatest- Charlie Munger and Warren Buffet, who doesn’t want to retire anytime soon, you need to think about creating a portfolio that can keep your lifestyle unaffected even after you stop working.
And here’s how you can calculate the amount you will need at your retirement age.
Supposing you are 25 years of age and you want to retire at 60 (Like a true Indian, just kidding), so you are 35 years away from retirement. And you want a monthly income of Rs.40000 by today’s value while investing in a bank FD carrying 8% interest with a 6% inflation rate. Also, assuming you will live till 85 years.
This can be calculated in two stages.
If you are worried about the number you have just seen. Believe me, it’s possible. In fact, a bigger number is possible than this. You can absolutely grow your wealth to unimaginable heights.
But it comes with a caveat, you got to live a frugal life and not lose money in the journey.
You can get the excel sheet to run changes and modify according to your age and expected return %. Click on the file below
So that’s it for today.
Now, you are among the top 5% who have a clear idea of how to navigate your financial journey.
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