Here are four main personal finance lessons
NEW DELHI: This week's story is about the four basic components of Personal finance and two women Una is an old aunt, widow and alone. The other is a divorced niece, with a small child to care for.
The aunt lives in an apartment that her husband left her, and is fighting the daughter-in-law who loves him urgently. The widow pension It's enough for her to survive. The niece got nothing from her bitter divorce and had to start over. the Personal finance lessons of their experiences are remarkable.
First, secure your source of income. No one, not even your near and dear ones, will be ready to spend on your needs unquestioningly. The aunt depends on her son for large ticket expenses that her pension can’t cover. She dreads the daughter-in-law’s questions during such times. The niece has learned in a few short years that even the loving siblings will not support someone they see as dependent. She found herself a job. Secure a source of income, from your job or profession or from your assets and investments.
Second, manage expenses sensibly. The niece decided to live and work in a smaller city, mainly to better manage expenses.
Third, assets matter immensely. The aunt is able to live comfortably on her meagre pension because she owns the flat. She is considering letting out the spare bedroom to a working woman to earn rent. Assets are useful for their value and the income they can generate. The niece worked with her back to the wall, with no assets to fall back on.
Fourth, keep the loans under control. The niece went through a traumatic moment rebuilding her life from scratch and thought that having a house was a priority. the EMI mortgage loan He kept her chained to the city she didn't like When she decided to move, she sold the property and was released from the debt burden.
These four points seem simple and obvious. But virtually all of Personal finance ’s precious lessons are encompassed in these four blocks: income, expenses, assets and liabilities. Just like the finances of a business. The business has its products and profits, the household only has its human assets.
The appropriate amount of income for a household is defined by its expenses. It is only when income exceeds expenses consistently and significantly that a household can build assets. The assets are buffers for future income.
When a household borrows, the repayment of the loan reaches the three blocks we have just discussed: it reduces income, increases expenses and impairs the ability to build assets. The loan has to build an asset that cancels all three effects to make it worthwhile.
All Personal finance decisions are about managing these four blocks so that assets are built with surpluses. The SIP is more important than the EMI only for this reason. It builds assets, and enables those assets to grow in value over time.
Personal finances are actually quite simple. We tend to complicate it because we like to justify our money decisions, post facto, mainly. We create assets that don't work for us; We accept income that is inadequate; We don't control expenses because we are too confident about the future; and we don't know our net worth for the most part, let's forget to actively manage it.
The aunt has used the house to generate much needed income; the niece has taken advantage of the location to reduce expenses and start saving. Both have taken over their finances because the levers are always in our hands, always.
(The author is president of The Center for Investment Education and Learning)