Are you one with a non-financial background? Having landed that dream job, you always wanted, it's now time to start work on financially securing your future as well. But why to work on financials? Well, think of just one data point- if one paid Rs. 10 lacs for a house in 2009-10 , on an average you needed to spend for the same house Rs. 17.2 lacs in 2014-15. Refer to report "Residential Property Price Indices from Reserve Bank of India"
If you fail to plan your personal financials goals, you will surely plan to fail.
And how to start financial planning? Some of the mere words from the financial universe can be overwhelming. However, to build that nest egg for the future, you need to start understanding few financial terms and concepts.
I thought of sharing 11 well-known basic principles of finance that I found useful in my personal finance planning of past 25 years.
1. Spread your risks: Never ever rely on only one type of savings or investment product just because it has rewarded you in the recent past. Diversification helps you minimize your risks and maximize returns on investments.
2. Start early : As the phrase goes, 'early bird catches the worm'. Be a smart investor and understand the importance of investing early. Reap the benefits of compound interest. The earlier you begin, the more you will be rewarded.
Study the case of two friends proactive A and lazy B highlighted in table below to understand huge benefits of starting investing early in life.
Sounds unbelievable, but it is true. Proactive A accumulated 32% more wealth in only 10 years’ saving than lazy B who invested identical monthly amount for a whopping 27 years.
Take another look at magic of compounding. The table below gives details of how an amount of Rs.10, 000 invested just once grows to a substantial amount in 25 years at various interest rates.
There are compound interest calculators of various Indian banks on their website. Take help of them for your calculations.
3. Beat inflation: Inflation is reality of life the world over. Inflation roughly means increase in prices of (goods and services) and a corresponding fall of money’s worth over a period of time.
Inflation works on similar principle as compounding interest.The major difference, though is, inflation erodes your net worth if you do not take care to remain above the inflation game. Consumer price index (CPI) is an indicator of inflation.
The table below gives one of the recent data on urban CPI as given by Reserve Bank of India in it Consumer Price Index - Annual Average Report
It roughly means you needed to spend Rs. 144 in 2015 for what you were paying Rs. 100 in 2010 for your household consumption. Unless your income options have increased by a similar percentage, your purchasing power has actually decreased.
4. Depreciation: Assets such as car and a motorbike depreciate in value every year. A new car value depreciates by 15-20 % percent within one year. It depreciates by a huge 50 % by fifth year.
Thus a Rs. 10 lacs worth brand new car will have a depreciated value of Rs. 8 lacs after just one year. It further depreciates to Rs. 5 lacs in the fifth year
5.Appreciation: Investment in real estate, gold, stocks and mutual funds generally appreciate over a long period of time (typically 5 to 10 + years). However, in the short term, all these assets keep fluctuating widely (positive as well as negative) in their value.
So be ready for a long term view for investing with these assets. More importantly, have a good study / understanding and decision making of your own before investing in these investment options.
As per RBI, residential property price index has appreciated from 100 in 2009 to 172 in Q3-2014-15 on all India basis.
Have a look at BSE Sensex (an indicator of stock market health in India) trend over last 12 years. There have been substantial dips from 2007 to 2010 and again 2010 to 2012. However, there is a substantial overall gain from 9398 to 26118 from 2005 to 2015. The learning is investments such as stocks need good knowledge and long term investment for ultimate gains.
Data Source: http://www.bseindia.com/ Historical Index
Summary is, keep yourself updated on personal finance aspects. Financial planning is very crucial for your financial well being throughout your life.
I will mention six more of my learnings next week. Do you have any of your inputs on personal financing that have been successful? Do share with GFM readers.
Mrs. Ujwal Gurjar has written this blog. Ujwal is a commerce graduate and homemaker. She is a founder of this website GEM For Home.
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