Hi, Hello, Namaste

To all of you self-aware folks stepping into the world of personal finance, congratulations! Whether you’re here to learn how to save, budget, or invest, you’ve made an important decision that can shape your financial future. While I’m still navigating this path myself, I’ve gathered some tips, mental models, and practical advice over the past year and a half to share with you. Let’s dive in!

Why Personal Finance Matters

Our relationship with money often stems from our upbringing, environment, and life experiences:

  • Did you receive pocket money or have to earn your way early?
  • Were you taught to save or spend without hesitation?
  • Have you ever experienced a financial crunch?

Understanding your financial habits and history is crucial. Your approach to personal finance should be rooted in these experiences but oriented toward growth and discipline.

Personal Finance Setup

Let’s start with the basics:

  1. Divide Your Salary into Buckets: Allocate your income into clear categories such as:
    • Essentials (50%): Rent, groceries, utilities, etc.
    • Savings & Investments (20-30%): Emergency funds, mutual funds, stocks.
    • Discretionary Spending (20-30%): Entertainment, travel, etc.
  2. Emergency Fund: This is a non-negotiable. Aim to save at least 3-6 months’ worth of expenses. It can serve as a safety net or be used for opportunities like investing during market dips.
  3. Simplify Banking: Use multiple bank accounts strategically:
    • One for everyday expenses.
    • One for savings/emergency funds.
    • A credit card for building a healthy credit score—but only if you can pay it off fully every month.
  4. No Idle Cash: Keep your money working. Anything beyond your emergency fund should be invested, even in low-risk instruments like fixed deposits or money market funds.

Mental Constructs Around Money

  1. Your Purchasing Power is Income Minus Savings: Shift your mindset. Your real spending power isn’t your salary; it’s what remains after you save and invest.
  2. Invested Money is Untouchable: Think of investments as locked for the future. Avoid withdrawing funds unless it’s a genuine emergency.
  3. Automation is Key: Automate savings and investments so that the money is allocated as soon as you’re paid. What’s left in your account is for spending.
  4. Buy Assets, Not Liabilities: Whenever possible, prioritize buying assets (e.g., stocks, ETFs) over liabilities (e.g., luxury items) to build wealth. Consider reinvesting the returns from these assets to fund your future luxuries.
  5. Know Your Risk Appetite: Understand how much risk you’re willing to take. If you’re young and have fewer responsibilities, you might explore high-risk, high-reward investments. Just make sure you’ve done your research.

Hacks and Practical Tips

  1. Avoid BNPL and EMIs for Luxuries: These can trap you in a cycle of debt. Save up instead and pay outright for non-essential items.
  2. Tax Efficiency:
    • Use rent agreements to claim House Rent Allowance (HRA).
    • Invest in ELSS funds under Section 80C for tax exemptions up to ₹1.5 lakh.
    • File IT returns to reclaim TDS if you’re earning below the taxable threshold.
  3. Insurance is a Must:
    • Life insurance for family security.
    • Health insurance to cover medical emergencies.
    • General insurance for your assets.
  4. Emergency Fund and Liquidity: Don’t over-allocate to long-term investments if you don’t have an emergency fund. Liquidity matters during unforeseen events.
  5. Start Early: Leverage the power of compounding. Even small amounts invested consistently can grow significantly over time.

The Scope of Personal Finance

Personal finance is a wide-ranging field encompassing income, expenses, savings, investments, and protection. Here’s a quick breakdown:

  1. Income: Understand all sources—salary, rental income, dividends, etc. A clear picture of your income helps in effective budgeting.
  2. Expenses: Regularly monitor and categorize expenses to identify unnecessary spending. Tools like Notion templates can simplify tracking.
  3. Savings: Develop the habit of saving first and spending later. Aim to save at least 20-30% of your income.
  4. Investing: Diversify your investments across equities, mutual funds, and fixed-income instruments. Consult financial advisors if needed.
  5. Protection: Adequate insurance ensures you’re prepared for emergencies. Never overlook this aspect of financial planning.

Resources for Learning More

  1. Investopedia: A treasure trove of personal finance knowledge.
  2. Mint: Budgeting and tracking made simple.
  3. Government Tax Portal: Learn about tax-saving instruments and IT filing.
  4. YourStory: Stories and tips for managing finances as a young professional.

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