Mastering Personal Finance: A Beginner’s Guide with a Comprehensive Starter Kit
In this article, we’ll explore the basics of Personal Finance and provide you with a starter kit that includes easy-to-use spreadsheets to help you get started quickly. We’ll cover everything from budgeting and saving to investing and debt management. Plus, we have a bonus tip at the end that you won’t want to miss.
Introduction to Personal Finance
Personal finance is the management of one’s financial resources to meet their financial goals and objectives. It includes budgeting, investing, saving, and managing debt. Having a good understanding of personal finance is essential for anyone who wants to achieve financial stability and independence. By taking control of your finances, you can create a financial plan that helps you achieve your goals, build wealth, and secure your future.
Benefits of Planning Your Personal Finances
Planning personal finance is crucial for several reasons. Firstly, it helps you identify your financial goals and priorities, and determine how much you need to save and invest to achieve them. Secondly, it allows you to manage your cash flow effectively, avoid unnecessary debt, and build a solid financial foundation. Thirdly, planning your personal finance can help you prepare for life’s unexpected events, such as emergencies or a sudden loss of income. Lastly, it helps you develop good financial habits and achieve long-term financial success.
Getting Started
To help you get started with your personal finance journey, I have created a Starter Kit that includes five easy-to-use spreadsheets. These spreadsheets will help you track your expenses, create a budget, set financial goals, and plan your investments. To begin, make your own copy of the Starter Kit and start working on the sheets.
Basic Details Sheet
The Basic Details Sheet is where users can input their personal financial information. The yellow highlighted rows indicate the information that users should input, which includes their date of birth, monthly income, and estimated expenses for needs, wants, and savings at present. Based on this information, values such as expected needs, wants, savings, and how the investment fund should be allocated are inferred.
What is the 50:30:20 Budget Rule?
This rule suggests allocating 50% of your income to Needs, 30% to Wants, and 20% to Savings. Needs refer to essential expenses like rent, utilities, and groceries, wants are non-essential expenses like dining out and entertainment, while savings are allocated for emergency funds, retirement, and other long-term goals. It’s essential to maintain a balance between these categories to ensure financial stability. You can read more about the 50:30:20 Budget Rule in this Investopedia article:
https://www.investopedia.com/ask/answers/022916/what-502030-budget-rule.asp
What is Debt & Equity?
Another crucial aspect of personal finance is understanding the difference between investing in Debt/Fixed Income Securities and Equity. Debt/Fixed Income Securities include bonds and other fixed-income investments, while Equity includes stocks and mutual funds. Many Financial experts strongly upvote and practice The ‘100 minus Age’ rule, which states that your portfolio’s percentage of equity assets must be equal to the difference between 100 and your age.
For example, if you’re 30 years old, the suggested allocation would be 70% Equity and 30% Debt/Fixed Income Securities.
SMART Goals
SMART Goals sheet is designed to help users set financial goals that are Specific, Measurable, Achievable, Relevant, and Time-bound. Goal setting is crucial because it helps individuals focus their efforts and resources towards achieving a desired outcome.
The sheet includes four example goals with different timelines and purposes. Each goal has fields to input the year of planning, the year of need, the estimated inflation rate (set as 6.5% you can use the same), the type of investment instrument, and the split (calculated based on the 100 Minus Age Rule), return assumptions per year (10.5% based on personal experience may vary from case-to-case basis), the estimated tax rate on the interest earned (depends on the income tax slab), based on which monthly investment required to meet the goal is calculated.
Among the 4 goals I have mentioned, Emergency Fund Creation will be common for all. An emergency fund is a stash of money set aside to cover unexpected expenses or financial emergencies, such as job loss, unexpected medical expenses, or major car repairs. It is recommended to have an emergency fund that covers at least 6 months of your monthly expenses.
For instance, if your monthly expenses are INR 25,000, your emergency fund should be INR 1.5 lakhs.
The emergency fund should be easily accessible rather than being locked away, as it defeats the purpose of having an emergency fund.
Expenditure Tracker
The Expenditure Tracker sheet is designed to help users track their income, expenses, and investments throughout the entire financial year. The sheet consists of green-colored rows that represent sources of income, such as salary, bonuses, and savings, and red-colored rows that represent expenses, including debt repayment, rent, monthly expenses, and miscellaneous wants. Users are expected to input their opening account balance and update the sheet regularly at the end of every month.
The yellow-colored row represents the investment fund, which can be allocated based on the remaining money. The sheet calculates the net balance for the month and deducts it from the estimated closing account balance and the liquid fund holding at the end of the month. In case the net balance goes below zero or the liquid fund holding goes below 15000, set as an example, the cell will be colored red to indicate a red flag.
Investment Portfolio
The Investment Portfolio Sheet is designed to give an exclusive view of the investment fund available each month and how it is expected to be allocated based on the 100 minus Age Rule mentioned in the Basic Details Sheet. The user does not need to input anything in this sheet. At the end of the current month and the current financial year, it shows how much we are expected to invest in each of the debt and equity funds and how much liquid funds we will hold.
Instruments to invest
The Instruments sheet provides information on various investment options classified as Debt, Equity, and Alternate Commodities. The Debt section provides information on instruments like Fixed Deposits, Recurring Deposits, Debt Mutual Funds, etc. The Equity section provides information on instruments like Equity Mutual Funds, Stocks, etc. The Alternate Investment section provides information on options like Gold, Real Estate, etc.
Users can use this sheet to explore different investment options, understand their features, and make informed investment decisions based on their financial goals and risk appetite. It is important to note that investment decisions should be made after thorough research and consultation with a financial advisor, as different investment options come with varying degrees of risk and returns.
Bonus Tip: Recommended Personal Expense Management App
For those who want to further manage their monthly expenses, I recommend using the “Money Manager Expense & Budget” app, which is available on both the App Store and Google Play Store. With this app, users can record their expenses, income, and transfers, as well as create their own categories for better organization. The app also allows users to view their spending statistics on a weekly, monthly, or annual basis in the form of pie charts, providing a clearer understanding of where costs can be cut and where overspending may be occurring.
So, to wrap it up, getting in charge of your financial future is crucial if you want to live the life you truly desire. It might seem overwhelming at first, but trust me, there are tons of resources out there to support you. Just keep your eyes on the prize, stay determined, and don’t be shy to ask for help if you need it. With a little bit of persistence, you can build a solid financial foundation that’ll help you reach your goals. Wishing you all the luck in the world!