Personal Finance Rules

We all earn money through various professions. We give so much focus to salary that we can earn. However very few people give same importance to management of money that we earn. One thing that I have realised is that our money is our responsibility and it’s very crucial to learn how to manage it wisely. With this sense I read a lot about personal finance topics. Below are few personal finance rules which I believe could be helpful for managing our finances effectively:

1. Maintain Three Separate Accounts: This helps in effective tracking of finances and builds accountability.
   • Income/Salary Account: This is where your monthly income is deposited.
   • Investment Account: Allocate a portion of your income for investments, such as stocks, mutual funds, or other assets.
   • Expense Account: Use this account for your monthly expenses, including bills, groceries, and other necessities.
2. Avoid Mixing Insurance and Investment: Do not go for ULIPs and other related plans.
   • Insurance is meant to protect you and your family from financial risks, such as health emergencies or life events. Keep your insurance products separate from your investment portfolio.
3. Invest According to Goal Horizon:
   • Define your financial goals, whether short-term (like buying a car or going on a vacation), medium-term (such as buying a house or funding education), or long-term (like retirement planning). Invest accordingly to achieve these goals within the desired time frame.
4. Understand Investment Products Thoroughly:
   • Before investing, research and understand the investment products available, including their potential returns, taxation implications, associated risks, and liquidity.
5. Avoid Investing Solely for Tax Savings:
   • While tax-saving investments are beneficial, don’t invest solely for tax benefits. Focus on investments that align with your financial goals and offer favourable returns, tax efficiency, and risk management.
6. Don’t Hold onto Bad Financial Products:
   • If you have invested in a financial product that is consistently under performing or a bad product from beginning, consider exiting it even if it means incurring a loss. Holding onto such products for too long can lead to wealth destruction.
7. Stay Away from Ponzi Schemes:
   • Be cautious of investment schemes promising unrealistically high returns or using new investors’ money to pay existing investors. These are often Ponzi schemes that can result in financial losses.
8. Regularly Review and Rebalance Your Portfolio:
   • Periodically review your investment portfolio to ensure it remains aligned with your financial goals, risk tolerance, and market conditions. Re-balance your portfolio if necessary to maintain diversification and optimise returns.
9. Consider Direct Mutual Funds for Lower Expense Ratio:
   • Direct mutual funds typically have lower expense ratios compared to regular mutual funds, leading to higher returns for investors. Consider investing in direct mutual funds to minimise costs and maximise your investment gains.
10. Emergency Fund:
    • Build an emergency fund that covers at least 3-6 months’ worth of living expenses. This fund acts as a financial cushion during unexpected events like job loss or medical emergencies, preventing you from dipping into your investments or taking on debt.
11. Financial Education:
    • Even if you take advice from registered finance advisers, continuously educate yourself about personal finance, investment strategies, tax planning, and financial markets. Stay updated with the latest financial news and trends to make informed decisions.
12. Retirement Planning:
    • Start planning and saving for retirement early in your career. Consider investing in retirement accounts like EPF, PPF, NPS, or private pension plans to build a retirement corpus that can sustain your lifestyle after retirement.
13. Tax Planning:
    • Optimize your tax planning by leveraging tax-saving investments, deductions, and exemptions available under the Income Tax Act. Consult with a tax advisor or financial planner to create a tax-efficient investment and savings strategy.

By following these principles and staying informed about financial matters, you can make sound financial decisions and build a secure financial future.