Basic Rules of Personal Finance

For some people, getting personal finances in order is most difficult part of their life. However there are few basics and if we follow them properly it can make our financial life easy and systematically. Let’s discuss these basic commandments and understand their implications in our life.

1. Not just read but take Action

We keep on reading various articles about personal finance however just jeading about how to improve your personal finances will not work unless we take the action of putting what we learn into motion. Before we can get anywhere with our personal finances, we need to begin and the best time is-- right now. If we are reading this article, we know that we should be taking steps to get our personal finances in order.

First thing we should do is to take a print out of this list and place it where we can see it every day, so that it reminds us that personal finance is a priority in my life and that I shall take some action each and every day to try to improve it.

2. Credit Cards are costliest loan so clear it first

Credit card company’s charges interest rates between 3-4% monthly compounding which comes to 40-50% annualized. This is the costliest loan ever. In many cases people just pay the minimum due amount and that results into a debt trap. This is the number one enemy to our personal finances. It can have a huge negative effect if we don’t pay our credit card bills fully every single month. Make this a top priority.

3. Keep the Cashflow positive

It is simple math that our cash inflows should be higher than cash outflows. If we want to keep our personal finances in order, we should live on less money than we make. That means either our total expenses for goods and services we use should be less than our current income, or we should find out a way to increase our income so that we can spend more, but still less than what we make. Either of these is perfectly fine.

We should create a budget and track our expenses to see where we are spending and how it fares vis-a vis our income. If we are spending more than we make, we need to decide whether to curb unnecessary expenses or figure out how to increase the income.

4. Wants and Needs! They are different

We need to understand the difference between wants and needs yes they are different and must be differentiated to keep our personal finances in order. Yes we can spend some amount in small luxuries, however it should be in budget and after meeting the essentials.  It is very important to realize that wants are not needs. If we understand the difference and control our spending’s our finances will be in much better shape.

5. Pay Ourself First

Keeping specific amount for our future/emergency needs is a must. So before we start spending money on other expenses we should pay our self a minimum of 15-20% of take-home pay. This money is not part of monthly spending budget but saved for future goals/emergencies. A direct debit from bank account to liquid funds could be a good starting option for that.

6. Have Specified Financial Goals

We should have specified financial goals as per our requirements In order to reach them. Every person has their life style and priorities hence specific goals, so we should understand and decide our specific financial goals and when we want to achieve them. Based on these goals steps need to be taken to reach them.

7. Save and Invest

The money taken out (as mentioned in point no. 5 that you pay yourself) should be invested properly so as to make it grow and work for us in the future.

As mentioned in point no. 2 If we are carrying credit card debt, invest in (pay) it first. We should also make sure to take full advantage of various tax saving and investing opportunities that are available. Build retirement corpus and make sure to have an emergency fund.

8. Be Responsible for our Decisions

All of us cannot be expert on finance and investments and may feel it more convenient to hand over all our money matters to somebody else. However we should have the final say in all decisions about our money. We may seek out advice and get opinions on our finances, but in the end it is my money hence our responsibility. Remember we are the only one who is going to truly look after our own interests.

9. Protect the Assets

Life is uncertain and beyond our controls hence we should take all the necessary steps, usually through insurance, to make sure that our assets are protected in case of a disaster.

Take the time to check and ensure that all assets are properly insured, and re-evaluate this every few years or whenever a major life change occurs, such as marriage or a new addition to the family. Also be sure to compare insurance rates on a regular basis, since this is a competitive business.

10. Contribute to the Society

We may be not very rich but there are a lot of people that are far worse off than us in the world. It's important to nurture a sense of giving and to be thankful for the small things that we have. That means donating to worthy causes on a regular basis.

We can select a few causes that we believe in, and give to them generously. It’s not just money that we can give. Volunteering time and skills are also appreciated by most charitable organizations.