Why do we need Personal Finance?
Davinci in the Digital Renaissance
Kuber is believed to have created the concept of money and wealth from the earth's resources, highlighting his role as the god of material prosperity.
In today's fast-paced world, knowing how to handle your money is essential. Personal finance isn't just for when you get older or have an ultra-high net worth; it's something everyone needs to get a grip on. Whether you're a student, a working professional, or someone planning for retirement, understanding personal finance can make a huge difference.
Not understanding how to manage finances or be financially disciplined has led Indians to accumulate enormous debt.
Credit Card spending has reached ₹18.26 lakh crores in FY 2023-24 which is a 27% increase year-on-year.
Credit card defaults stood at ₹4,072 crores and outstanding balances at ₹2.4 lakh crores.
Vehicle loan from banks have witnessed a staggering 137% increase over the past 3 years reaching a total of ₹5.08 lakh crores.
Car loans continue to dominate the user preference as the traditional preference for home ownership has declined.
Personal loans has grown to nearly ₹52.7 lakh crores
Absence of Corporate borrowing prompted banks to chase personal loans more aggressively.
Education loans surged to ₹96,847 Crores in FY23 recording a remarkable 17% increase since previous year.
Outstanding household debt has reached a record ₹27.23 lakh crores in March 2024.
Commercial Real estate debt stood at ₹ 4.48 lakh crores.
Non-housing debt, which stood at 72% of the total household debt, grew at a faster clip than housing debt.
Let's dive into why personal finance is crucial for every Indian and how it can help you live your best life.
Inflation is Real
Inflation is like that one relative who just won't stop visiting – it's always there! The purchasing power of money decreases when inflation visits, impacting personal finances across various sectors. Once inflation starts to occur, the expectation of inflation can further sustain the devaluation of money, making it essential for individuals to understand and adapt to these changes.
In 2024, India's retail inflation rate has shown a promising trend, dropping to 4.83 percent in April from 5.09 percent in February, within the Reserve Bank of India's (RBI) tolerance band of 2 to 6 percent. For individuals, lower inflation helps maintain the purchasing power of their money, making essential goods and services more affordable. However, with food inflation remaining high at 8.66 percent in February, it’s important for households to budget carefully and perhaps allocate more towards essential expenses.
To protect your personal finances from the eroding effects of inflation, it's crucial to maximize the value of your cash. One effective strategy is to ensure your savings earn a high annual percentage yield (APY). This higher rate, while not completely offsetting inflation, significantly reduces the loss in purchasing power. Additionally, holding only the cash needed for monthly expenses, an emergency fund, and short-term goals while investing the rest can avoid cash drag.
For the average individual, staying ahead of inflation requires a multi-faceted approach. This includes keeping pace with rising costs, strategic debt management to minimize interest expenses, and prudent budgeting with an emphasis on cutting discretionary spending in inflated categories. Ultimately, maintaining financial health in an inflationary environment demands vigilance, adaptability, and a meticulous plan that balances current needs with future financial security.
Uncertainty is the New Normal
Life is unpredictable, and unexpected expenses can crop up anytime. Whether it's a medical emergency, job loss, or something else, having an emergency fund is a lifesaver. Financial experts generally recommend putting away 20% of each paycheck every month.
It's best to keep your emergency fund separate from your other bank accounts. You want your emergency fund to be accessible in case you need it quickly but not so convenient that you're tempted to withdraw unnecessarily. When it comes to this account, you should have a "set it and forget it" mentality.
Once you’ve filled up your emergency fund, don’t stop. Continue funneling the monthly 20% toward other financial goals, such as a retirement fund or a down payment on a home.
Financial Freedom
Whether it's purchasing your dream house, funding your child's education at a top university, or starting your own startup, sound personal finance practices are key to achieving your goals in India's dynamic economy. Implementing a well-structured financial plan can transform this stressful experience into one of empowerment and focus.
By clearly defining goals, creating a structured savings and investment strategy, and automating key financial processes, individuals can shift from constant money management to a more balanced approach. This plan acts as a personal financial GPS, guiding through life's financial twists and turns while building a robust safety net. The result is a newfound freedom - the ability to pursue goals with confidence, indulge in life's pleasures without guilt, and redirect mental energy towards personal growth and relationships.
Financial fitness goes beyond simply managing your salary and investments. It's about striking a balance, While optimizing your income through smart career moves and side hustles is important, don't forget to allocate funds for activities that bring joy to you and your family. This could mean setting aside money for an annual trip to your hometown, celebrating festivals with gusto, or pursuing a hobby like classical music or yoga. Having a budget for these enjoyments can actually motivate you to maintain financial discipline in other crucial areas like saving for retirement or building an emergency fund.
Remember, the path to financial freedom is a marathon, not a sprint - with the right plan, financial stress can be transformed into financial empowerment, allowing focus on all the experiences that make life truly worthwhile.
Avoiding BAD Debt Traps
Credit card debt can be a nightmare, but it’s unrealistic not to own any in the contemporary world. Since childhood, we have been taught that debt is bad and that one should make sure that they deal with it carefully without falling into situations that can put them and their family in extreme distress.
However, not all of your debt is bad. There's something called good debt too. Good debt allows you to effectively manage your finances and leverage your wealth. It enables you to acquire assets for use during unexpected emergencies. In a way, it also provides security in the face of unexpected events.
Bad debt refers to debt incurred to finance liabilities that are not likely to generate any income or have any future value. These expenses are heavy on your pocket and don't give you any returns. Credit card outstanding, car loans, personal loans for discretionary spending, luxury items or depreciating assets are all considered as bad debt.
Personal finance teaches you to avoid high-interest debt and how to pay it off quickly using methods like the avalanche or snowball method. Another way to make sure you won't be paying interest for small purchases that you make over time is to use a debit card, which deducts payments straight from your bank account.
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