Personal finance management is important for securing your future and maintaining financial freedom. From strategising new investments and starting a new business to planning retirement and building a financial portfolio, having a clear and strategic approach to managing personal finance is crucial for securing your financial goals.
This article gives a deeper perspective into the meaning of personal finance management, what it entails, how it can be effectively achieved, and ways to put your money to best use.
What is Personal Financial Management (PFM)?
Personal Financial Management (PFM) refers to the process of managing your personal finances, including budgeting, saving, investing, and tracking expenditures. It involves making informed decisions to balance income, expenses, and financial goals. The core of PFM is to achieve financial stability and long-term security through efficient use of available resources. Tools and apps designed for personal financial management help individuals monitor their cash flow, plan for the future, and make smarter financial decisions. Understanding personal financial management is essential for anyone looking to take control of their financial life, achieve goals, and avoid debt traps.
Once you have decided on your financial goal, developing a budget plan is the next step in personal financial management. This is knowing how to spend and save money and match the two to your long-term objective. An appropriate budget can be created in several ways. This may be done manually with a spreadsheet or journal or using software available on the Internet that is often connected to a bank account.
While using any of these approaches, it is essential to consider your desired debt repayment strategy and your cash flow. For instance, paying off credit card debt is critical if your objective is to lower debt and raise your credit score. To reduce the monthly credit card payment amount, some individuals pay off credit cards with the highest interest rates first, while others pay off ones with smaller amounts. You need to decide which option best suits your financial strategy.
Personal financial management (PFM) with example
Realising your financial objectives and establishing financial security need proper personal financial management. Here's a simple example of understanding personal money management:
Budgeting
The cornerstone of sound personal money management is budgeting. It facilitates tracking your earnings and expenditures. To begin with, list all of your sources of income, including salary, freelancing job, and rental income. Next, write down your expenses, including housing, utilities, food, transportation, and entertainment.
For example, let us consider that your monthly income is Rs. 2,00,000 and monthly expenditures amount to Rs. 1,50,000. Rs. 50,000 is the amount that is left to invest or save. So, it is essential to keep track of your income, expenses, and disposable income that can be utilised for any investments.
Savings
Achieving long-term objectives and creating an emergency fund require savings. Try to store away 20% or more of your income. This money can pay off future investments and unforeseen costs like medical emergencies or automobile repairs.
For instance, if you save Rs. 15,000 a month, by the end of the year, you will have saved Rs. 1,80,000.
Manage debt
Sustaining excellent financial health mostly depends on efficient debt management. Pay off high-interest loans, such as credit card payments, as soon as you can. To stop interest from increasing, make on-time payments on mortgages, student loans, and other long-term obligations.
For example, paying off a Rs. 10,000 credit card debt with an 18% interest rate early will save you from substantial interest charges.
Also read: Types of debt mutual funds
Financial planning
Over time, investing expands your wealth. When it comes to investments, real estate, mutual funds, stocks, and bonds are usually the most preferred options. If you wish to invest in these sectors, make sure that you plan your investments well and spread the risks to realise profits.
For instance, Rs. 50,000 invested in a diversified portfolio, yielding 7% a year, may provide approximately Rs. 85,000 in 10 years.
Keep an eye on changing circumstances
Examine your financial plan frequently, and make changes depending on your goals or specific needs. Your financial circumstances might be impacted by life events like marriage, education, or a new career. Maintain flexibility and modify your investments, savings, and budget plans as needed.
To reach your financial objectives more quickly, enhance your savings rate or invest the extra money strategically.
Strategies for effective personal finance planning and management
Long-term objectives and financial stability can only be reached with efficient personal finance planning and management. Making wise investment decisions, developing a strong savings strategy, effectively managing debt, and constructing a comprehensive budget are all part of it.
Gaining control over your money, lowering financial stress, and securing a bright future may all be achieved by knowing and using essential financial techniques. Continual evaluation and modification of your financial plan guarantees that it is still applicable to your evolving situation and keeps you on course to achieve your financial goals.
1. Understand and prioritise your financial goals
The first step towards good personal financial management is determining and establishing your main financial objectives. Start by laying down specific, doable goals, including paying off debt, saving for a down payment on a home, or creating an emergency fund. Sort these objectives by priority and timeframe. Having particular goals directs your financial choices and acts by keeping you motivated and focused. Maintaining your objectives current and reachable when your circumstances change can help you achieve long-term financial success.
2. Make sure your goals are SMART
Your chances of success are higher when you set financial targets that are SMART— Specific, Measurable, Achievable, Relevant, and Time-bound.
- Specific: Save Rs. 50,000 for a down payment on a home.
- Measurable: Save Rs. 5,000 monthly, starting from July 2024, to reach the goal by December 2024.
- Achievable: Set realistic goals while considering your financial situation. Make it challenging yet achievable.
- Relevant: Align your goals with your overarching financial objectives, such as debt payoff or financial freedom.
- Time-bound: Save Rs. 50,000 for a down payment on a home within 10 months, starting from July 2024 and completing by April 2025.
You may create a clear strategy for accomplishing your financial objectives by SMARTing them.
3. Get into the habit of budgeting
A simple method to manage personal finances is budgeting. First, list all your income and group your spending—like for rent, utilities, food, transport, or fun activities—into different categories. Put into practice a budget approach that suits you well. For instance, try applying the 50/30/20 rule, where half of your income goes towards necessities, thirty percent towards wants, and twenty percent gets saved or is used to pay back debts.
Regularly review and adjust your financial plan as per changes in objectives and monetary situation. You can control your money by discovering areas where you can reduce unnecessary expenses and verifying that you are living within your financial limits. This can be done by regularly monitoring how much money comes in versus how much is spent. Building an emergency buffer or getting ready for a significant buy are just two examples of monetary goals for which budgeting is crucial.
Also read: What are personal funds
4. Track your spending
To achieve goals and have financial control, you should keep track of your expenditures. At the beginning, note every cost, even if it is very small. Write down your everyday spending on a simple notepad, spreadsheet, or budgeting software. Then, group your expenditures, like groceries, eating out, transportation, and entertainment. Now, you can see where the money goes.
Checking your spending habits often helps you identify areas where you might be spending too much and try to change that habit. By being mindful of how much money goes out of your pocket, you can stay within your budget, steer clear of unnecessary debt, and ensure that you are saving enough money for investments, emergencies, and other financial goals. Keeping an eye on what you spend helps you manage a budget well.
5. Get out of debt and stay out
It is necessary to clear all debts to attain stability and independence in finances. List every debt you have, such as credit cards, personal loans, and education loans. Include the rates of interest and minimum payments for each one of them. Begin by paying off high-interest obligations, then only settle the minimum on other debts. Consider debt avalanche, which means that you pay the loans with the highest interest rates first. Or think about debt snowball, which is a method that helps you pay off the smallest obligations before the bigger ones.
Once you finish repaying your debts, it is crucial to establish routines that will help you maintain freedom from debt. You should create a budget that includes saving money as its top priority in order for you to build an emergency fund. By using credit cards responsibly and making full payments each month, you can avoid accumulating more debt. Keeping away from debt not only contributes to long-term economic stability and peace of mind but also teaches self-discipline and thoughtful spending.
6. Automate your savings and payments
Automating your savings and payments can help you maintain financial discipline and reach your objectives. On payday, set up automatic transfers from your checking account to a savings account. This guarantees that savings are given priority without depending on manual efforts.
Similarly, automate credit card, rent or mortgage, utility and other recurring payments. Plan your payments for the due dates using bill pay services or online banking. Automatic payments help keep credit scores high, prevent penalties, and guarantee on-time bill payments, lowering financial stress.
Automating payments and savings helps you organise finances better, develop savings quickly, and establish consistency in your spending patterns. It also affects financial security and mental clarity, lowering the possibility of forgetting payments.
7. Look for hidden opportunities to lower your spending and increase your monthly cash flow
Spotting undiscovered opportunities to save costs can impact your monthly cash flow. Examine your usual spending first, including utility bills, insurance, cable or internet plans, and subscription services. Seek ways to cut these expenses by combining two or more services, negotiating better pricing, or moving to less expensive service providers.
Examine your spending patterns on things such as eating out, movies and entertainment, and shopping. Allot a specific budget to these areas and then search for places where you may make savings without compromising comfort. Think about substitutes like using coupons, cooking at home, or looking for free or inexpensive activities.
Also read: What are liquid mutual funds
8. Work with an advisor and don’t be afraid to ask for help with debt
Consulting a financial advisor can offer insightful information and provide customised plans suited to your specific financial circumstances. An advisor can assist you in establishing reasonable goals, developing a customised financial strategy, and negotiating difficult financial choices, including retirement planning and investing. They provide knowledge and objectivity to help you make well-informed decisions that fit your objectives and risk tolerance.
You may consult a finance counsellor or other debt management experts if you have financial difficulties. They assist with budgeting and financial literacy, negotiate with creditors on your behalf, and combine debts into affordable installments. Debt repayment might take longer, and financial hardship can worsen if aid is avoided or delayed. So, working with experts guarantees you knowledgeable guidance and assistance, helping you make wise financial choices and reach financial security. When you need help, do not be scared to ask for it; doing so is a proactive step towards bettering your financial situation and reaching your financial objectives.
How does personal finance management help in mutual fund investing?
Mutual fund investing needs personal finance management because it gives an organised way to make financial choices and enhances the general results of investments. So, it helps with:
Having clear financial goals, which is crucial in managing personal finances. These objectives could be for retirement savings, schooling purposes, or even buying a house, which can guide you towards making mutual fund investments that align with growing your income and preserving capital.
Good budgeting and saving methods create funds you can use for mutual fund investments. When you create a budget, set aside a part of your income regularly to systematically put money towards mutual funds and earn interest.
Personal financial management involves understanding investment danger and deciding on risk acceptance. Using this knowledge, you can select mutual funds that align with your risk profile—whether it's cautious, moderate, or aggressive.
The main concept in managing personal finances is diversifying investments. Mutual funds offer this by collecting money from many people to invest in a wide range of stocks, bonds, or other assets. This spreading out of risk helps to lower the risks tied to any single investment and usually enhances portfolio steadiness.
Keeping an eye on your own money and mutual fund holdings often allows for necessary adjustments. Regularly rebalancing your portfolio and monitoring its performance can help keep it aligned with personal financial goals and market conditions.
Personal financial management provides a foundation for disciplined mutual fund investment. It helps in goal-setting, managing risks, diversifying investments, and optimising resources. Mutual fund investments eventually allow the creation of assets over time as well as financial security.
Tips to consider for personal finance management
Create a budget
Begin by writing down your earnings and expenditures to observe where the money is being utilised. Distribute your funds into savings, needs, and extras so you do not spend more than what comes in.
Establish financial objectives
Determine short-term and long-term financial objectives, such as retirement planning, saving for emergencies, or a major purchase. To stay motivated and focused towards your aims, set specific goals that can be measured.
Set aside an emergency fund
Save up enough money in a dedicated account to cover three to six months' worth of living costs. This fund is for handling unexpected expenses such as medical bills or layoffs, so you do not have to go into debt.
Eliminate debt
Concentrate on paying off high-interest debt. Apply tactics such as the debt snowball (pay smaller bills first) or the debt avalanche (start with high interest debts), giving priority to repayment of high-interest debts. Decreased debt helps lessen financial pressure and frees up money for investments and savings.
Create an automatic payment system to simplify bill payments and savings account transfers. This strategy will help you save regularly, avoid late penalties, and develop financial discipline.
Credit monitoring
Make timely payments and utilise credit wisely to keep a decent credit score. Check your credit report often for inaccuracies. If you manage debt well, you may get better loan terms and cheaper interest rates. Lenders review personal files to assess debt management. You may get loans with reduced interest rates if you make fewer mistakes or have a history of repaying debts in a timely manner.
Think carefully before investing in mutual funds, stocks, or retirement accounts. Assess your risk tolerance and investment objectives.
Review frequently
Periodically check your financial plan and modify it as needed, taking into account alterations in targets, spending patterns, or revenue sources. Stay updated on money-related advancements and seek professional advice if required.
These tips can help you establish a solid foundation for managing your money efficiently, attaining financial freedom, and achieving monetary objectives.
Key takeaways
- Budgeting: Create and stick to a budget to control spending and save effectively.
- Financial goals: Set clear short-term and long-term financial goals for better planning.
- Tracking expenses: Regularly monitor expenses to avoid overspending and identify savings opportunities.
- Savings: Prioritise saving a portion of income for emergencies and future investments.
- Debt management: Minimise and manage debt through planned repayments to avoid financial stress.
- Investment: Diversify investments to grow wealth and secure long-term financial stability.
- Financial tools: Use personal financial management apps or tools to simplify tracking and decision-making.
Conclusion
Realising your long-term objectives and attaining financial security depend on good personal financial management. By using essential techniques such as goal-setting, budgeting, debt management, and prudent investment, you can take charge of your money and create a solid financial future. You can monitor your spending and prioritise savings by creating a budget, and having specific financial objectives will give you direction and drive.
Wealth building and financial freedom can eventually result from strategic debt management and investing. Personal financial management ultimately enables you to reduce financial risks, make wise choices, and strengthen your resistance to economic downturns. Adopting these habits will improve your financial health and provide mental support since you know you are on the right course to reach your goals.
If you are considering investing in mutual funds, you can compare 1000+ top-performing mutual fund schemes by visiting the Bajaj Finserv Mutual Fund Platform. You can also use handy financial tools like the lumpsum calculator to strategise your investment journey.
