Managing Personal Finances Systematically

personal finance

Managing your finances can be one of the simplest activities in your life if you perform it systematically. Apart from a little basic mathematics and accounting knowledge, a few of the good books, and a little portfolio management skills is all you need. The following are the simple steps you have to follow to manage your finances.

 

Let’s Read First

This is an important step if you are starting from scratch. Every investor believes that he/she is a rational investor, but most of our decisions are hardly rational. Our perception, faith, emotions, and other related factors do influence both our investment and expenses decisions. 

You can start reading books like Rich Dad Poor Dad, Your Money or Your Life, and The Millionaire Next Door to get a clear picture of what personal finance is and what is required to be financially healthy. 

 

Your Current Financial Stability

Now before starting the actual management, you should accurately calculate your current financial stability or financial health. Here you have to maintain a record of your regular expenses and your income, which in simpler terms can be an inflow and outflow sheet. There are a lot of people who don’t care much about their expenses, further ending up being in a financial deficit. 

 

Cash Flow Management

The most important and the most influencing component of your budget is the inflows and outflows you make. Inflows are easy to track, but managing the outflows is a little tough job. The cash flow management will help you to differentiate between your needs and wants.

The best part about cash flow statements is that they will present your expenses, incomes, and savings most systematically. This helps us to cut or reduce our expenses which in turn maximizes our savings. Sufficient savings are a sign of successful budget planning. The savings that you will make here will help the next component, your investments, to grow. High savings and assets will give you a better net worth much faster than other means. 

 

Investments

Better cash flow management and a successful budget give a good amount of savings which helps you here. Intelligent investments are considered to be the key to being wealthy, and investments will improve your future financially. 

The best possible way to maximize your return on investment is diversification. Now here you need a little portfolio management skills. Design and present your investment portfolio in such a way that gives you a clear picture of both your expected and actual returns. Understand the concept of Debt & Equity mix and do read about investments in other commodities and derivatives. 

 

Insurance

Now here I will be talking about 2 different insurances. Firstly, the actual insurances. They help us to deal with sudden expenses and emergencies. These insurances are Medical & Health Care Insurance, Car Cover, Life insurance, etc. They may look like an unnecessary cost, but they hold good value in emergencies. In health emergencies, when you will need money immediately, rather than selling off your investments to pay for your treatments, you will claim your insurance covers. 

 

The second type of insurance we are talking about, will not guarantee you any claim or cover on a loss, but it can increase the chances of your portfolio not stepping in a loss. Yes, we are talking about portfolio insurance. There are different strategies you can adopt to reduce the chances of ending up with a negative portfolio. You just have to use Futures and Options to hedge your portfolio or to reduce the risk. For example, if you feel that a bad day’s wave is expected to come in the market, you can short the NIFTY 50 Option, so in case the market goes down, the Option trade will give you gains which will cover your portfolio loss. This is what systematic portfolio management is. 

 

Net Worth Building

Now, most probably, after going through all these steps, you will be clear with the concept of managing finances. Now move on to achieving your goals. Accurately track your portfolio and budget, try to start with less amount of investment, learn from your experience, and always work on maximizing your portfolio and net worth. The early you start, the more experience you can gain.  

 

Never stop reading, the investment guru Warren Buffett himself says that reading is one of the most important activities you need to perform to be a successful investor.

 


 

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