Do you know that relying on school education for personal finance is not a good idea? School teaching always concentrates on essential subjects like science, economics, maths, and history, but they always neglect to provide students with basic personal finance knowledge.
Below are ten personal finance rules that you likely didn’t learn in school:
Rule No. 1: Create an emergency fund
You should always create an emergency fund of at least six months’ salary. This will help you cover unexpected/unplanned expenses, such as medical emergencies or job loss, without going into debt.
Rule No. 2: Track spending
As a golden rule to avoid overspending, you should always track your spending. You can make a monthly budget and follow the same to check where your money is going. This will help you in identifying avoidable expenses. You can download any app on the Google Play Store or Apple Store.
Rule No. 3: Start investing early
You should start investing earlier to give your investments more time to grow. For example, at 25, Mr X has started investing Rs. 1000 monthly and earns an average annual return of 7%. By the time Mr X reaches age 65, the investment would have grown to around Rs. 25 lacs. On the other hand, if Mr Y started investing the same amount at age 35, you would be surprised to know that his investment would only be worth around Rs. 12 lacs by the time he reaches age 65.
Rule No. 4: Understand the power of compounding
Compound interest can work for you or against you. If you save, it will work for you and help your money grow. If you’re borrowing, it will work against you, leading to rapidly increasing debt. The above example shows that a delay of 10 years in investing can lower your retirement corpus by Rs. 13 lacs.
Rule No. 5: No credit card debt
In India, credit card interest rates typically range from around 24% to 48% per annum, plus other charges, penalties and fees. Never opt for the minimum payment option in credit cards; you will pay more interest and costs. Permanently settle credit card outstanding in full.
Rule No. 6: Avoid lifestyle inflation
As your salary grows, spending more money increases, often on unnecessary or discretionary items, rather than saving or investing the extra income. Lifestyle inflation can lead to a cycle of excessive spending and debt.
One effective strategy to avoid lifestyle inflation is automating your savings and investment contributions using the standing instructions facility almost all banks offer. By setting up automatic transfers to your investments, you can ensure that a portion of your income is being put towards your future goals.
Rule No. 7: Build a good credit score
Your credit score impacts your ability to take a loan or even get a future job. Yes, you heard it right: companies have begun considering credit scores while doing background checks on candidates in India. Ensure you pay your EMIs on time and keep your credit utilisation low. The ideal credit utilisation percentage is generally recommended to be less than 30% of the total available credit limit.
Rule No. 8: Plan for retirement
It’s recommended to start planning for retirement early, preferably when you start working in your 20s. To secure your future, commence a plan and begin saving as soon as you can.
Rule No. 9: Adequate insurance cover
Adequate insurance coverage is an essential part of personal finance. It is recommended that you have the right coverage for your needs.
Rule No. 10: Learn negotiation skills
Your negotiation skills can save money. Negotiation skills are helpful while negotiating a salary with an employer, the price of a high-value item (such as a car, a home, or expensive electronics) or interest rates on loans with a bank.
Final Words:
In conclusion, while schools often overlook essential personal finance topics, taking control of your financial future requires knowledge beyond traditional education. By adhering to these ten personal finance rules – from building an emergency fund to mastering negotiation skills – you can lay a solid foundation for financial success. Empower yourself with these principles to navigate the complexities of personal finance confidently and secure your financial well-being for the long term.