The Why, When, and Who of Personal Finance
Why learn about personal finance?
In our previous article about financial literacy (read more here), we discussed an introduction about the basics of personal finance. But where does one go from there?
When we start working after college (in our early 20s), our knowledge of personal finance is often inadequate. We mostly do not know much about saving, budgeting, or investing the money we earn. Most likely, our families used to manage all our expenses all these years. As a result, managing this brand-new income (that we did not get before) can be quite confusing.
Some of us may be fortunate to have limited obligations at this age, while some of us may not. We may have to contribute a portion of our earnings to support our families, manage prior debts, or have other financial responsibilities.
Whether you are in the first category or the second, we still need to make decisions about what to do with our income and where to spend it.
We have to make choices between meeting basic needs, fulfilling our desires, and saving for the future.
What does it mean to be financially literate?
Handling our personal finances successfully allows us to be prepared for the future and prevent any risks during times of uncertainty. But what does it really mean to be financially literate?
Here are a few skills involved in handling our personal finances.
- Being able to assess our past financial activities to identify problem areas
- Being able to identify financial ‘baggage’ that needs to be addressed (good debt vs bad debt)
- Creating realistic financial goals for the future
- Evaluating progress towards the financial goals that we’ve set for ourselves
- Being able to take corrective actions related to our earning, spending, and investing activities
- Enabling a healthy balance in our relationships by communicating our financial standing with them
Note: All debt is not created equal. Some debt helps in enabling positive financial outcomes (good debt), and there is debt that does not help in any way (bad debt). We discuss this in depth in future articles.
It’s not just about budgeting
Many people believe that being in control of personal finances is as simple as creating and living within a budget.
However, even after creating and sticking to budgets, people do fail to turnaround their financial situations. Others complain that because of some reason or the other they are unable to stick to their budgets. If our excessive expenses are related to self-control issues then we need to give serious thought to it. That is where the most important virtue of self-discipline plays a role, something that is becoming rarer and rarer in the fast-paced consumer world we live in. We want to point out that budgeting is simply one small piece in the financial puzzle.
We all come across unforeseen circumstances in life, and they can be addressed efficiently through tools such as insurance coverage and emergency funds. These are defensive strategies. In addition, learning to plan for future goals in the shape of offensive strategies are relevant too.
The bottom line is, learning about this wide variety of tools and the options under each is a part of becoming financially literate.
Why is financial stability desirable?
Here is what financial stability can do for you.
- Enable you to be financially independent and not rely on external support
- Allow you to switch your career function or industry
- Allow you to take a career break to relax or focus on personal goals
- Enable you to start your own venture
Financial stability gives us the freedom to make future choices that are unavailable to people who do not work on their personal finance skills.
Most importantly, learning financial literacy skills helps us survive the ups and downs of life by giving us greater control and flexibility.
When should we start learning personal finance skills?
One of the most important things that we do not recognize is that the extra cash in our wallets today gives us a very powerful advantage. We can save this money or invest it in order to meet larger financial needs for our future. Our early twenties are a great time to lay the groundwork for wealth for our future.
“A seed sown today will turn into a tree and give you shade 25 years later”. This is an overused cliche, but it is absolutely true.
Many people may choose to spend their twenties having fun and being carefree about their financial habits. That’s a personal choice. But one cannot deny that strong financial planning early on can help us fulfil many life goals with minimal or no debt.
Basically, choose to start early for a financial advantage.
As we will explain in future articles, the sooner we start managing our finances (this includes expenses, debts, and investments), the sooner we reach a place of financial stability.
Who needs to learn financial literacy?
This is an age-old question and the answer depends on who you ask.
What we have come to realize is that everyone should learn the basics of managing money. Even if they are not working. Personal finance is a fundamental life skill, and understanding how it works gives us a perspective of how the world works. It applies to everyone—all genders, all ages, and all sections of society. One is never too young or too old to learn.
- As students, we can begin to understand financial realities and the seeds of money fundamentals begins here
- As working professionals or entrepreneurs, the importance of managing money inflow and outflow is obvious
- As non-income earners (e.g., a housewife, househusband or retired folks too), understanding where the money comes from and where it goes can enable mindful decisions about spending; in case of the death of the primary earner, this becomes critical
Many people also fall prey to fake claims made by stock tip sellers of earning big money overnight. Another category adopts a too conservative approach and invests all their funds in fixed deposits which don’t give very high returns. What is needed is a balanced and holistic approach while handling our personal finances.
Being prepared with financial literacy skills is like knowing self-defence skills. Even if you don’t always use them on an everyday basis, when the time comes, it can be a game-changer!
We hope that you’ve got a fair picture of why planning your personal finances is so crucial. The next step is to carve out a plan that can help us to become financially self-sufficient as early as possible.
Here comes the complex task of deciding on personal finance goals and the relevant tools. Majority of the youngsters suffer here due to lack of knowledge and time invested in learning about this.
Investing time and energy in learning to make informed decisions to create a solid future is truly worth it. We at Lokyatha are here to support you in this all-important journey of learning about personal finances.
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Disclaimer: This article is for educational purposes only. It should not be considered financial or legal advice. Please consult a financial professional before making any significant financial decisions.