Personal Finance: The Complete Guide (Updated 2022)

Personal Finance Definition

Personal Finance is the type of financial management process where the individual or a family performs to budgets, save, and spend monetary (money) resources over time, considering various financial risks & future life events.

The process of personal finance includes income generation, spending, investing, protection, and savings. It can be simply aggregated as the budgeting or financial plan.

Personal finance broadly includes budgeting, insurance, banking, mortgages, retirement planning, investments, tax & estate planning.

Term personal finance also refers to the industry or group of people who provide financial services or advice to individuals.

It (Personal finance) is all about meeting your personal financial goals, no matter the short term or long term financial goals. Planning for the long term goals like retirement plans or saving for the child’s college education needs.

These all the process and success depends on your total income, how you are spending, and the lifestyle you are living or requirement to live the life you want, your financial goals. Finally, preparing a robust plan to meet those requirements with financial constraints.

It is said that if you want to make most of your income & savings you need to become financially literate so that you can understand the differences between good or bad advice and can make smart decisions.

History of Personal Finance

Before the term personal finance was developed in the society, different types of similar disciplines that are nearly close to it, like family economics, and consumer economics were being taught in a few colleges or schools under home economics around 100 years.

A research conducted in personal finance done by Hazel Kyrk in 1920. This was her efforts at the University of Chicago laid the foundation stone of consumer economics & family economics.

Because of the limited educational resources of personal finance decision-maker did not make the best decision mentioned by Herbert A. Simon in 1947. Dan Ariely suggested in 2009 after the 2008 financial crisis showed human beings do not make a good decision always.

Earlier 1990, mainstream economists & business faculty paid little attention to personal finance for individuals and families. In past decades (30 years) many of the universities and institutions started offering courses in personal finance for undergraduate and graduate programs.

Recently (in recent years), concern about consumer “financial capability” increased dramatically, different types of education programs emerged for the wellbeing of individuals. In general, personal finance educational program is known as financial literacy.

Nevertheless, there was no standardized curriculum for personal finance education (financial literacy) earlier than the 2008 financial crisis. After 2008, it was important to develop a robust standard in the personal finance domain.

Pro Tips about Personal Finance in Current Time

• A few schools teach courses where you can learn how to manage your money. It is necessary for you to learn the basics of personal finance through free resources available online like articles, blogs, podcasts, or at the library.
• Smart & Cool personal finance includes making strategies that involved budgeting, creating and emergency funds, paying off debt, using credit cards responsibly, saving for the future, and much more.
• It is very important to be disciplined, but it is as important to know when to break the rule for good. For instance, young people investing 10-20% of their income can take these funds to pay off debt or buy a home for them.

Personal Financial Planning Process

The main part of the personal-finance process is financial planning, it is a dynamic (nature of changing) which needs regular monitoring re-evaluation, and changes as required to make it better. Although, the personal finance process includes five steps.

• Assessment: A simplified version of financial statements (Including balance sheet & income statement) of individual, this can help in knowing the individual personal financial situation in the current time. The personal finance balance sheet includes values of personal belongings (for example, stocks, car, bank account, home, and clothes, etc.). The income statement of a person includes personal income & expenses
• Goal Setting: It is very common to have multiple goals, good goals are a mix of short-term and long-term goals. For example, a long term goal can be retiring at a certain age with a certain amount, assets, and a short term goal would saving for a new laptop in the coming months.
• Plan Creation: This involves the process of creating or making a way to achieve those goals. It includes decrease unnecessary expenses, investing in the growth stock market, and increasing income.
• Execution: This is tough to control, all depends on the proper execution of the created plan. With the focused discipline and perseverance, you can achieve it and execute the plan well.
• Monitoring and Reassessment: Every type of plan needs adjustment over time, so keep an eye on the process and make necessary changes to make things easier for you.

Top 10 Personal Finance Strategies

It is better to start early financial planning, but there is no fixed time or date to start creating financial goals to make yourself and your family financially secure & sense of financial freedom.

Below are some of the best practices you can adopt for personal finance and achieve your financial goals.

#1. Make a Robust Budget

A Robust Budget plays a vital role in living within your financial constraints. Budgets can help you save enough money for your long term goals. We suggest you should use the 50/30/20 rule for budgeting. This can be explained as below.

• 50% of your total income (net income) goes for the living essentials like rent, groceries, utilities, and transport expenses.
• 30% of the income should be used for lifestyle expenses like shopping for essential (clothes and all) and dining out.
• 20% of the income is very important, so it is used for paying down debt and saving for retirement and creating emergency funds.

It’s not easier to manage personal finance but thanks to the budgeting and personal finance apps for a smartphone that helps you manage the day-to-day finance quickly.

There are budgeting apps that help you track and adjust your spending so that you have control over every penny.

Some of the personal-finance budgeting apps help you to manage everything from cash flow, budgets, bills to investment, and much more.

#2. Creating Necessary Emergency Funds

It is very important to follow the “pay yourself first” rule to ensure that unexpected expenses like hospital bills, car repair bills, or many more expenses can be handled easily.

While creating emergency funds you should make sure you can survive a period of 6 months at least with the amount including necessary expenses like utility bills and living expenses.

In the expert view, it is good to save 20% of your total (net income) for the emergency fund for the rainy days (any unexpected events including sudden unemployment). However, you should continue to contribute your 20% towards other savings after fulfilling the desired emergency funds.

#3. Use Credit Cards Responsibly

Credit cards are part of lifestyle but it can be a big trap to debt. But, you cannot imagine your life without a credit card in the modern world.

It (credit cards) can be a good thing if you can learn to use it wisely or with responsibility. The credit cards software can let you track your expenses, you can get benefits of budgeting.

Managing credit card very carefully means you need to pay the debt or due bills in full every month. If you are unable to do so try to minimize it up to credit utilization level (that is 30% of the total credit limit).

There are so many offers around the credit card spending like rewards points or cashback that lead you to spend more. Make sure you are not in a trap with these offers. It is advisable to pay off your credit cards bill on time every month to avoid late fees and extra expenses.

Using a credit card can make you pay the price of the product more than the maximum of the actual price with interest.

#4. Limit Debt (Any Kind of Debt)

A simple rule to limit your debt is, do not spend more than you earn. Nevertheless, people who use to take debt for something like acquiring assets can be beneficial.

When it comes to buying a home the mortgage loan is considered good. But make sure it is in your reach to pay it back within your earnings. Even, you can rent a car or other property to save yourself from getting in debt.

#5. Monitor or Track Your Credit Score

The important expect of the credit score is credit card usage. It makes your credit score and maintains it if used wisely. Tracking credit card expenses help you to keep track of the credit score.

When availing any types of loans be it a mortgage, lease, etc. you need to have a good credit history.

The credit score is measured in between 300 to 900 points. Below is a simple example to understand this.

• 750 = Good Credit Score
• 650 =  Average Credit Score
• 600 or Low = Poor Credit Score

If you do not want to miss the payment due date for the credit card. Make sure to use the auto-debit facility given by the credit card issuers. To keep track of the credit score you can use services like monthly credit reports at minimal price or free.

#6. Consider Your Loved One

In order to protect your assets when you will not be around and you wish to fulfill your desire. You should make a will and as per your convenience add one or two trusts.

You should consider the insurance products and review the insurance policy on regular basis. To make sure they meet all your and family requirements.

You should also, take care of your crucial documents like a living will or healthcare-related documents. However, not all the documents will save your time but healthcare documents help you while you fall ill.

It is also, important to teach your children the value of money and how to manage (save, invest, and spend) it effectively.

#7. Plan Properly for Retirement (Savings)

Savings for long term goals like retirement are much important than you think. According to the experts, most of us will need as much as 80% of the current income during retirement.

It is better to start saving for retirement as early as possible because you will get the benefits of compounding interest (the power of compounding). Even the small amount will rapidly grow with the help of compounding interest.

Savings for retirement will help you grow your money in a long time. You can also, take benefits of tax exemption if you invest in government pension schemes or other similar products.

#8. Pay Off Your Student Loans (If Any)

While studying you might have taken a student loan, there are options to repay your student loan. If the interest rate is high on your loan amount, it is good to pay off the principal amount faster.

Some of the loan issuers give options to reduce interest rates if you are opt-in for the auto payment of the loan amount every month.

Nevertheless, you should check the flexible repayment options that include the below points.

• Graduated Repayment: On a regular basis increases the monthly payment for a certain period of time.
• Extended Repayment: You can choose to the extent the repayment period for longer than the actual time

#9. Take Benefits of Tax Slabs

Because of the complexity of the taxation system, many of the people leave hundreds or thousands of rupees idle. If you learn the taxation system you can free a good amount of money with the help of tax slabs.

If you do so, you can even reduce your debt or invest that amount in other investment products. Even, you can use the amount to enjoy the current time to prepare for future expenses.

To save tax, you must keep all the relevant tax documents handy at the time of filing tax returns. You can take the help of a professional for making it simple for you to understand the taxation so that you can take care of your hard-earned money.

#10. Enjoy Your Hard Work

After putting your time and energy to plan and budgets, and saved money now you need to enjoy your time. You can occasionally go for vacations or dine out.

Even, you can purchase your desire things with the help of money you have saved by putting those hard work of planning and budgeting. The last but not least, it is advisable to spend some amount to hire a tax professional or financial planner (personal finance planner) to help you manage your money effectively.

Personal Finance Principles (Important Rules)

Now, you have a basic understanding of how to manage money in a good way. It’s time to learn personal finance principles or about the philosophy.

Getting your personal finance is not the key or learning new skills, but it’s all about understanding the principle or philosophy that helps in the success of the business.

Below are the 3 Key Principles of personal finance:

#1. Prioritization

Prioritization meaning that you know very well and understand how the finance work and what makes it successful, keeping those efforts intact.

#2. Assessment

Assessment is one of the key skill which keeps professional from breaking out. A learned professional have a good plan by which they can make things work in their favor. No matter it is about side business, a good investment idea they always have a plan.

#3. Restraint

Restraint is the final figure skill of successful personal finance management. Time to time, a good financial planner together with successful people, who all able to manage the more spending then they earn.

Learn About Personal Finance

When it comes to personal finance education, a few schools out there offering courses on how to manage your money. This clearly means most of us, need to learn about personal finance from other sources like friends or family (If lucky so).

By the way, there are other sources you can learn about personal finance and how to manage money effectively without spending much money on it. Even, you can learn about managing money for free online if you are really keen to learn about it. There are some media publications who regularly post about personal finance advice online.

#1. Personal Finance Education Online

For beginners starting by reading personal finance blogs online is a great start. With general advice on managing the money, you will get to know how people are facing the issue and the way they are handling it effectively.

Personal finance blogs/website like moneyvisual.com (It is full of the good financial stuff, you can get plenty of resources to learn about personal finance, taxation system, investment, how to use credit cards wisely, and many more advice on managing finance), moneycontrol.com, relakhs.com, goodreturns.in, taxguru.in and many more let you learn about personal finance in a good manner.

However, we (richbrite.com) also provide so much great stuff on how to manage finance for personal and businesses. You can start here and gain the knowledge as you spend time over here by reading free resources.

#2. Personal Finance Education through the Library

The library is one of the great sources to learn about personal finance and business finance. First and foremost you need to get a library card by visiting there in person. Later on, you can get access to hundreds of personal finance audiobooks and eBooks online (if the library offers the services).

Some of the bestselling personal finance books are not limited to (“Rich Dad Poor Dad”, “The Millionaire Next Door”, “Your Money or Your Life”, “Think and Grow Rich” for Business-related book like “Zero to One”) are great to learn about personal finance and business finance.

Personal Finance Podcasts

If you are a person who has limited free time then starting through the personal finance podcast is a great way for you to start learning about personal finance and managing money.

Below is some of the Great Personal Finance Podcast to Listen in 2021

• The Tim Ferriss Show
• The Mad Fientist
• Planet Money
• So Money
• The Fairer Cents
• We Study Billionaires
• Couple Money Podcast
• Creative Rebels
• The Dave Ramsey Show
• Money for the Rest of Us
• The Rich Dad Radio Show

The most important to learn about finance is to find the great resources that meet your learning style and you enjoy the way of learning. If some of the blog posts, courses, or finance podcasts make you feel not good, keep searching for the next best one for you.

Finance education is the continuous process of learning, so do not stop learning more once you got a basic understanding of personal finance because changes in the economy lead to developing new budgeting apps.

Things Classes Can’t Teach You

Education of personal finance is a good way for consumers, particularly for youthful ones, who all need to understand the investment basics and credit management.

It is not enough just getting knowledge about personal finance but consistency is the main key. Below are the three main mantras which will keep you motivated and on the right path.

#1. Discipline

One of the very important mantras of personal finance is systematic savings (consistent savings). If you are earning decent money, you should save a certain amount on the regular basis or invest that amount on a regular basis to be financially secure.

#2. A Sense of Timing

A few years later after college and the emergency funds have been established. Now the time to rewards yourself. A sports car costs thousands of dollars, investment in some other growth stock need to wait for another year.

Finally, you think there is plenty of time left to make an investment in growth stocks, right? However, holding your investment to launch for a year can have big consequences.

Now understand that the amount you have spent on the sports car, if invested could grow to a decent amount with the help of compounding. If you delay in investment can hold back your dream of retiring at the age of 50 or something you want.

#3. Emotional Detachment

Personal finance is like a business and business should not be taken personally in any situation. A tough but essential decision, personal finance decision include leaving your emotional touch while making decision.

Purchasing gifts or taking a huge loan for the family can make you feel good but can also delay your long term financial goals whatever you dreamed of. Great personal finance management means separating feelings from reasons.

Breaking Personal Finance Rules

Personal finance education may be taught you guidelines on “smart tips” to follow for the betterment of your financial life. However, it is great to know about the rule but according to your circumstances, you can break to twist the rule. Below are some important tips on breaking personal finance rules.

#1. Saving or Investing a Set Portion of Your Income

Good budgets involves saving a certain amount of your net income each month for retirement (Generally 10% to 20%). While it is good to financially responsible but saving a certain amount for your retirement can not be enough at all circumstances. The future is crucial and uncertain.

For young people should consider paying off their biggest expenses of life span like-new car, new home, or post-graduation degree. Saving 10% to 20% per month makes sense to purchase those things in life.

However, it does not make sense of saving or investing money if you have to pay back your credit card or higher interest loans. A higher interest rate on your loan would eat your returns you get from your much-balanced investments.

Saving money to explore new places for young people, who all need to make a decision about their life goals can be beneficial.

#2. Long-Term Investing & Investment in Riskier Assets

In the case of young people, the thumb rule of investment is to think for long-term goals & stick to those investments.

This is the easier rule to justify the breaking of rules. It is good to be able to understand the market and make the necessary changes in your investment portfolio rather than sitting idle and watch losing your money. The short time investment has its own advantages.

At this time, if you are not invested in long term investment products, you can go for a safer investment. But, for young people, it is advisable to go for a long-term investment horizon and invest in higher-risk ventures (be cautions before investing). There is a chance to recover the loss with time if any happen due to market fluctuations.

Personal Finance Careers Options

There are plenty of carrier options in the field of personal finance management and advice. If you are good at personal finance and business finance management you should consider starting a carrier in personal finance and money management.

A Few (not limited) Selected Carrier Options which are:

• Personal banker
• Wealth manager
• Investment advisor
• Insurance advisor
• Tax advisor
• Estate planner
• Financial planner
• Mortgage broker