Tuesday, January 11, 2011

UPER of Personal Finance

The four cardinal steps of personal finance are

1. Understand
This is the first and most important step is to understand what personal finance is all about.  If your basics and fundamentals of finance and money are clear and strong, then consider that the foundation has been laid. The key topics should include (but not restricted to) Basics of Finance, Investment Avenues, How to Invest and Portfolio Assessment.

You can choose how you want to go about this step. For e.g.: You can read books, you can browse online, you can register for online tutorials, you can enroll for formal lessons, etc. Whatever be the method of learning, you need to ensure that your learning is complete. One of the best ways to test yourself is to try and explain the basics to your friends / family – If you can answer their questions; this is a good measure of your comprehension. If not, then you probably need to go back and re-build your foundation.

While the basic foundational learning is a good starting point, what is also of utmost importance is to continuously upgrade your knowledge.  This is definitely a worthwhile investment of your time. One of the easiest ways to do this is to subscribe to a newsletter or to follow the blogs / tweets of some experts / veterans in this area which will enable you to widen your knowledge base over a period of time.

2. Plan
You need to have a plan. And to have a plan you need to have a clear assessment of your “current state” and a view of the “desired state”. Your desired state should clearly articulate your personal financial goals and the time frame in which you want to achieve them.

Also, you need to be completely aware of all the inflows and outflows – both current and for those planned for the future. While tracking on a daily basis can be on over kill and drain you of your time and energy, you should know broadly know the net totals on a weekly basis – both of the inflows and outflows.

You can choose to make this plan by yourself or take professional help – But you should have a structured plan. Ensure that your plan has the following views:
a) A long term view which will help you reach the desired state
b) An annual view which will help you in the current year and be beneficial for your tax planning purpose
c) A more granular view (probably monthly / weekly / daily view) which will translate what this plan means for you on an ongoing  basis

All of the above plans need to be realistic – in terms of the time frame, in terms of the expected savings, in terms of expected returns and in terms of the impact on your current lifestyle.

Once you have the plan in place, ensure that you set reminders for yourself to execute the plan. For e.g.: Either as Post-It notes, on your Calendar, etc.

3. Execute
Next, it’s time to execute. You need to consciously work on having the required savings – This could mean making small changes in your day-to-day lifestyle and making some sacrifices today for a richer tomorrow.

Next invest the savings wisely in the right avenues as per your plan. Once you do achieve a specific milestone, do ensure to reward yourself.

4. Review
This is probably one the most important (and often ignored step) in the process. Ensure that you review the state of your financial portfolio periodically (at least once a quarter). This will give you a good view on how your various investments are performing.

Ensure that you make the required changes (For e.g.: Add some new investment avenues, Stop some investments, Increase the amount in some investment avenues, etc.) as per your evolving requirements, changes in lifestyle, current market conditions and future forecasts.

In the long run,
i) Financial literacy is definitely one of the foundational pillars of structured wealth creation
ii) Discipline is the key to successful execution
iii) Do think and plan for probable emergencies / contingencies – For e.g.: An unexpected illness, unplanned large expenditures, etc. Ensure you have adequate buffers to handle these situations
iv) If you don’t know or understand something – Ask. Choose the right person to get your queries answered. It’s probably better not to ask, than to ask the wrong person!!!
v) Be open to learning – You never know who teaches you a lesson about money!!!
vi) Refresh your basics once in a way – Every time you think that you are forgetting what it’s all about!!
vii) You will learn and prosper only if you are experimental, take some calculated risks and also possibly incur some losses
viii) Do seek investment advice from people whose opinion you value
ix) You need not seek approval from all and sundry for your personal finance plan
x) Listen and learn from the mistakes of the “financially wise” – There’s a wealth of information you can absorb from others mistakes
xi) At the time of the actual execution of your plan, do a quick re-check. Ensure that you think rationally about the financial choices that you are making
xii) An occasional de-tour from your original plan is probably completely acceptable; provided it does not have any catastrophic impact on your plan and life
xiii) Trust your instinct

In conclusion, you work hard to earn money. Be smart to make your money work for you!!!

1 comment:

  1. I think me and "P" are following the basics of your UPER to some extent.You write and explain well.