Basics of Personal Finance

Basics of Personal Finance:

There are a few reasons why you as a student/young adult should learn how to handle your money now. As a student/young adult, you have likely begun to crave independence. Managing money on your own is an excellent first step toward becoming independent from your parents. No matter where you go in life or what you choose to do, money will always come into play in your daily decisions.

If you can master the art of basic personal finance in your teenage years, you will have all the tools you need to effectively manage your money now and far into the future. Whether you realize it or not, you are always influenced by the people around you. The way your family and friends deal with money has a huge effect on how you deal with money. Problems arise when the people around you aren’t managing their personal finances as they should have been. Because of these bad habits,  you might assume it is completely normal to be broke, have bill collectors calling your house, or charge up credit cards for things you don’t really need. Be aware that not all parents want to talk about money with their children. Allowing you to take a hard look at their finances can make some parents feel like they are revealing a huge failure.

Adults generally fall into one of three categories:

Spender: As soon as there is any money, it’s usually gone. Sometimes it seems like they have no control over money whatsoever.

Saver: These people always seem to have money stashed away, but rarely spend the money on anything unless there has been careful consideration first.

Combination:  This is a mixture of the other two categories; they not only spend money but also save. They have a perfect balance between spending and saving.

The next time you go out with your family or friends, pay attention to how each of them spends their money. Are they making good decisions, or are they spending with reckless abandon? Some people buy impulsively, some people buy compulsively, and some people hardly spend at all. If you can figure out how and why the people closest to you spend money, you will probably notice a trend that is or would be similar to how you spend your own money.

Personal finance concepts become a lot easier when you realize it all boils down to two things: spending and saving. In other words;

• What do you do with the money once you have it in your hands?
• Do you run out and buy whatever catches your eye, or do you make purchases you have planned for beforehand?
• Do you buy things you need, or do you buy things you want?
• Does any of your money go into a piggy bank or savings account, or is it gone before you can even consider putting some of it away?

“Need versus want”

This is a common phrase in personal finance. The line between needs and wants can be pretty blurry sometimes, so it is important to learn how to figure out which category a purchase you want to make falls into. Do you need it, or do you want it?

You may be surprised to discover a lot of things you think you need are actually things you want, and you don’t need them after all.

What falls into the category of need? Think of the things you actually need to function within your life. Food is a need. The shelter is a need. Clothing is a need. Keep in mind, though, many of these needs may be met by your parents at this point in your life unless you are already out on your own. As you begin to live life more independently, your needs list will grow quite a bit when you start paying for utilities, food, and shelter but be rest assured, even adults can have a hard time distinguishing between a need and a want.

How many times have you seen a magazine ad or a television commercial where the teens within the advertisement seemed cheesy? As a teen, you are within a group that is highly valuable and intriguing to advertisers. You have what is referred to as disposable income, which means you have the money you can spend without worrying you won’t be able to pay your mortgage payment or put food on the table. Advertisers want to figure out how to get you to spend, spend, spend, and they don’t want you to know they’re trying so hard. If you are going to take control of your money and your spending, you need to know marketers are always throwing messages at you, even when you don’t realize it’s happening. What types of messages are they throwing at you? They want you to feel as though you need their product for you to be popular, or that their product will make your life better than it is now. They use many different types of advertising to influence you to buy certain clothes, listen to certain types of music, and eat certain types of food. Why do you need to know this? You now know that one of the best ways to take control of your money is to first control your spending.  You should realize companies depend on your being unable to resist the urge to buy things you don’t need.

How many times have you bought something on impulse? You know you are making an impulse purchase when you buy something you had no intention of buying and you later realize it wasn’t even something you needed. Maybe you see a shirt in a store window and impulsively decide to buy it, but by the time you get the shirt home, you realize that you don’t even really like it and will probably never wear it, so the shirt just sits in your closet without ever being worn. Impulse buying can turn into a larger problem when it evolves into compulsive shopping.

Compulsive shoppers buy items because they can’t resist the urge to shop. They also usually claim to feel a “rush” or a “high” from shopping, which is quickly replaced with feelings of guilt or depression. This is considered an addiction by some behavioural scientists, just like drug addiction or gambling addiction. Compulsive shoppers usually fall deeply into the debt trap. Chances are, however, you don’t fall into the category of a compulsive shopper, but instead, you do have some experience with impulse buying. While it may be fun to buy something without having planned it out beforehand, too many instances of impulse buying will drain your wallet and may lead to more serious problems in the future.

Some tips to avoid impulse buying:

1. Think through your purchases before you make them – you are going to run out of money quickly if you make purchases without first considering how the purchase will impact your finances.
2. Leave your credit card at home when you shop – You might prefer to use a debit card, but if you only take the exact amount of cash needed to make a purchase, it will be impossible to impulsively buy a bunch of other stuff you don’t need.
3. Budget your spending – If you have a written budget and stick to it you will be much less likely to make impulse purchases.

Money should be enjoyed, as long as that enjoyment is combined with some savings too. If you can find a balance between saving and spending, you will have an easier time with your finances than most other people do, while also having the ability to buy the things you want without draining your savings account. You might already have a bank account you maintain well. If so, that’s great! Many people get far into adulthood and never really figure out how to manage their bank accounts, so you’re already ahead of the game.

These are different types of bank accounts – Savings Account, Current Account, Recurring Deposit Account, Fixed Deposit Account, DEMAT Account, NRI Account.

A savings account is an interest-bearing deposit account held at a bank or other financial institution. Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs.

A Current account is a type of non-interest-bearing deposit account offering a significantly higher number of transactions (In terms of cheque issuance, deposits, withdrawals, and D.D. issuance etc.) and services designed for business purposes.

The Recurring deposit account is an account in the bank or in a Post office where a depositor deposits a preset amount of money every month for a fixed period (generally ranging from one year to five years).

The fixed deposit allows you to invest your funds for a fixed term and earn returns at a fixed interest rate. The interest rate on your FD is higher than a savings account, so you can grow your savings furthermore.

A Demat account is an account that is used to hold shares and securities in electronic format. The purpose of opening a Demat account is to hold shares that have been bought or dematerialised (converted from physical to electronic shares), thus making share trading easy for the users during online trading.

An NRI account refers to the accounts opened by a Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) with a bank or financial institution which is authorised by the Reserve Bank of India (RBI), to provide various services.

Now that you know the accounts offered at financial institutions, you might be wondering where exactly you should put your money. If you do not have a bank account right now, don’t panic. The account best suited for you has a lot to do with your money situation at this point. Which of the following scenarios sounds like you?

1. You don’t have a steady income, like a job or an allowance.
2. You get money as gifts or from doing work once in a while, such as tutoring or content writing or data entry or youtube videos or game testing etc, but you don’t have a recurring income.
3. You have a job and get paid regularly.

It is advisable to contact a representative of the financial institution to have the terms of your bank account fully explained to you depending on the scenario you are in.  If there is something you do not understand, ask more questions.

There is a rule in personal finance called “the 10% rule”. This is a rule many people follow, dictating how much money they put away into a savings account intended for nothing more than emergencies. This is a fund that is not for a specific purchase; instead, it is money that you put away “just in case”. This rule says you should always put 10% of what you earn into your savings account. Don’t forget about the concept of compound interest*. You may not feel like you are putting away very much money when you only put away 10%, but you are setting the stage for interest to accrue or build up. Before you know it, you will have quite a bit of money stashed away. If you can get into the habit of always paying yourself first, you will develop a great financial habit that will certainly serve you well when you hit adulthood and have a bunch of bills to pay. Of course, you don’t want to avoid paying your bills to put money into a savings account, but the goal is to have enough money to save while also paying your bills.

*Compound interest: Compound interest is interest earned from the original principal plus accumulated interest. Not only are you earning interest on your beginning deposit, but you’re also earning interest on the interest.

You have probably heard the word  “budget”  tossed around a lot, whether it’s your parents telling you that a certain expense “isn’t in the family budget”, or a newscaster talking grimly about the “nation’s budget deficit”, Instead of your money coming and going, leaving you broke and wondering where it all went, you will learn to take charge of your finances and figure out where you should spend your money and how much of it you should spend. If you want to be the boss of your money, budgeting is the way to do it. A budget is a written plan for your money that takes a look at how much money you have compared to how many expenses you have. It is a relatively simple concept. You first figure out how much money you bring in (your income), and then figure out where your money needs to go.

Some people have a loose budget they keep in their minds and never write it down on paper or enter it into a computer. They may tell themselves they can only spend so much on a certain expense and so much on another expense, but they do not make the effort to put their budget in writing. While it is admirable that they are trying to budget their money, their budgets would most likely be much more effective if they took the time to make a written budget.

Why is it so important to write down your budget?

By writing down your budget, you not only figure out where your money has already been going, but you can also tell it exactly where you want it to go. When writing down their budget, people who use credit cards often realize they actually spend more money than they make, which is never a good financial situation.

Here is how to write a budget for yourself:

1. Figure out how much money you make each month.
2. Write down how much money you save each month.
3. Figure out how much money you owe every month for recurring bills.
4. Figure out how much money you spend on other expenses.
5. Do the math. Add up all your expenses, including the recurring bills and the other expenses, then subtract this total number from the income you wrote down in the beginning.

Credit is the term used to describe the act of lending money to someone, and it is big business. Offering credit is a money-making venture, and it has nothing to do with trying to help people. It is all about making a profit. In the vast majority of instances, creditors aren’t doing anything illegal. They are merely offering a product to consumers and earning money when the consumers utilize the product. Creditors charge interest as a way of making a profit on the money they are lending you. The interest you are charged on your credit account can pile up quickly because compound interest applies with credit interest just as it does with the interest you earn from a savings account. The longer you take to pay off your credit card balance, the more interest your account will accumulate, and the more money you will wind up paying in the long run. Instead of falling prey to the marketing tactics used by creditors, learn how to spot the tactics beforehand so you aren’t tricked into getting the credit you don’t really need.

What is the minimum payment? This is the amount of money that the credit card company requires you to pay each month to avoid extra fees, which is usually 5% of the total outstanding payment due. To stay current with your account, you must pay at least the minimum payment requested by the lender. This amount can change from month to month based on how much money you owe.

Is it mandatory to make a minimum monthly payment? The answer is yes, but you also want to pay more. Ideally, you should always pay off your balance every month to avoid interest charges, but if for some reason you can’t manage the full balance payment in one month then make the maximum payment possible for you or in the worst case at least make the minimum monthly payment. This will keep you out of trouble with the lender. Keep in mind that you should not make a habit of only making the minimum monthly payment. The minimum monthly payment will be too low of an amount to pay off the balance in any reasonable amount of time, especially when you consider that interest charges are constantly getting tagged onto the outstanding dues.

COMMON CREDIT CARD FEES INCLUDE:

Annual fees: Most credit cards charge an annual fee. But these fees are generally waived off if you use your card regularly and achieve a minimum spend, this varies from bank to bank. For example, to waive off the annual fee, you may have to use your card to a certain amount within 90 days of the card-issuing date. Now you understand how they make you use their credit card to spend? Some banks may offer a free credit card, which means no joining fee or annual fee or no conditions attached like stated above, for a certain period or a lifetime.

Maintenance fees: These include annual r  monthly fees charged for nothing more than having the account open and active. Not all credit cards have these fees, and you should avoid cards with them if possible.

Finance charges: This is the interest the bank charges if you settle your credit card outstanding bills after the statement due date. Normally credit card gives you 25 to 50 days of the interest-free credit period. If you clear the outstanding credit card bill on or before your due date then you won’t have to pay any finance charges.

Penalty fees:  These fees are charged when you do something with the account that you aren’t supposed to, such as;

• Making your card outstanding payment late then you will be charged with a late payment fee
• Exceeding your preset credit limit then you will be charged with a credit over-limit fee. These fees can add up quickly, banks charge a hefty amount as the over-limit fee.

So, always make your payments on time, and don’t exceed your spending limit.

Transaction fees/Other charges:

This includes fees for;

• Withdrawing cash from your credit card instead of using the card for purchases (this fee is also known as a cash advance fee). Cash withdrawal or cash advance is quite a costly transaction as it entails very high fees/interest charges. Important: Many users do not know that the interest is charged on cash advances right from the day of making the transaction; the interest-free period does not apply for credit card cash withdrawals.
• Transferring one credit card balance to another credit card, which is called a balance transfer.
• You lost your card and want a duplicate card to be issued.

Foreign Currency Mark-up Fee: If you use your credit card for any foreign transactions, then a fee is known as a foreign currency mark-up fee is charged. The fee may differ from one card to another and is usually charged as a percentage of the transaction amount.

A major portion of card revenue for the banks comes from merchant fees. When you buy a product using a credit card, a percentage of its value goes to the card-issuing bank. Then the revenue comes from the fees/charges. However, if you use your card only for online and offline purchases and settle your bills before the due date, your credit card is free from these charges. So, yes, a credit card can be free if you know how to use it smartly.

A credit score is a number that represents a person’s creditworthiness. Credit scores are based on a variety of personal financial data. Higher credit scores correlate with better creditworthiness. Financial institutions judge people with higher credit scores to have lower credit risk and grant them a broader selection of credit products at lower interest rates. Understand that your credit score is important, and a good score can significantly impact an individual’s ability to borrow money as well as the interest rate they receive on this loan. Credit scores also can affect the ability to rent/buy an apartment/house, lease/buy a car, or even get a job. When the time comes for a credit card, understand that it is only for convenience, not to extend buying ability.

• Never carry a balance; pay every bill on time and in full.
• Make sure to leave some room on credit cards.
• Do not “max out” accounts or charge up to the credit limit.

Understand the importance of building an emergency fund. Conventional wisdom holds that individuals need to save at least six months’ worth of living expenses to prepare for the unexpected.

Your credit report and credit score paint a picture of how you manage your personal finances. A good credit report has a few credit accounts listed with no late payments reported at all. It isn’t uncommon to have one or two late payments on your credit report, especially when you are fairly new to managing your own credit.

Keep in mind, however, that every single late payment puts a blemish on your credit report, and your credit score will be lowered as a result. When you are struggling to establish credit and raise your score, every little negative item on your credit report can have a huge impact. A good credit score is a key to future success in many areas of your life. A good credit score allows you the ability to achieve basic things such as getting a job and buying a house.

Debt provides a method of taking advantage of opportunities and experiences that enhance the quality of one’s life and provide enjoyment and fulfilment. Homes, vehicles, vacations, education, and all of the things that enhance one’s quality of life are obtainable by making good use of debt.

Good use of debt requires that one develop a spending plan that incorporates methods of properly maintaining and managing the acquired debt. Almost everyone will rely upon credit at some point.  Whether credit is used to finance luxury and big-ticket items, such as a car, or it is used to finance an unexpected medical or other emergencies, one needs to be put in the position of being capable of acquiring the necessary financing when it is needed or wanted. By borrowing responsibly, one builds a positive credit history that indicates to lenders that they are a good risk for lending money. Most lenders examine one’s history of using credit in determining whether to issue additional credit. If one’s credit history indicates a commitment to managing debt properly, the lender is more likely to extend the necessary financing when needed and also provide the most favourable interest rates and payment schedule.

Investing involves more than putting money into the stock market.  An investment is a situation in which you put money into something you think will eventually make more money, therefore giving you even more money than you started with. For example, a producer gives money to a theatre company to put together a stage play with the hopes that ticket sales will be enough to make a profit for the producer. Another example of investing is buying a  home, renovating it, and selling it at a higher price than you purchased it for.

Here are some things to consider before investing in anything, now or in the future:

1. Always keep in mind that you should not empty your savings account to invest in anything. Money spent to invest should be extra and should not compromise your ability to pay your bills or to live with life’s necessities.
2. Do I understand the investment? Whether you want to buy stock in your favourite company, or you want to buy art that you hope will be worth a lot of money someday, don’t invest money in things you don’t fully understand.
3. Am I ready for ups and downs? You shouldn’t expect your investment to always make money, especially if you invest in the stock market. Stocks go up and down sometimes wildly and if you are going to be a long-term investor, you will have to get used to your profits fluctuating.

Taxes are charged by the government based on a percentage of your income. The government uses the money obtained from charging taxes to fund everything, such as infrastructure programs, fire departments, welfare programs, and the military.

Insurance is something designed to cover costs for an unexpected and substantial expense. You pay a  set amount each month to the insurer, and the insurance company covers your costs if an event happens in which you need to utilize your insurance.

Here are examples of common insurance policies:

Car insurance: This covers the cost of replacing or repairing your car if you get into an accident and also pays for damage done to vehicles and property in an accident when you are the one at fault.

Health insurance: This pays for the cost of medical care, either fully or partially, and is usually provided through employers or parents. You can buy health insurance on your own, but it is usually very expensive.

Life insurance: This pays money upon your death to whomever you specify as your beneficiary.

Homeowner/renter insurance: This covers the cost of repairing the place you live and the property in the residence if a natural disaster or other covered mishap occurs.

• Every individual needs to plan and manage their personal finances effectively to meet their financial goals and obligation, retire in comfort,  achieve financial freedom,  make rational financial decisions and take advantage of every financial opportunity to lead a  happy life.
• Every individual needs to have their personal financial plan in order.
• We are all not born with this knowledge, so it should be everyone’s responsibility to learn the strategies to plan and manage our personal finances as this does not only help to lead us to a  happy life but also contribute to the development of the nation in the long run.