Personal Finance Is Simple: You Should Keep It That Way
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Keep it simple stupid (KISS) is a design principle which states that designs or systems should be as simple as possible. Whenever there is complexity, it should be avoided.
The same principle applies to almost everything in life and personal finance is no different.
In fact, it is a lot like being healthy. You just need to do a few simple things right, in this case, eat the right food, exercise and avoid smoking and drinking and you should be healthy.
“Sticking to basics means keeping an emergency fund, buying term insurance and health insurance early. Once these are taken care of then keeping it simple starts when one starts spending what’s left after investing based on their risk appetite from their income,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi) Registered Investment Advisor (RIA) and Founder and Chief Investment Advisor, SahajMoney, a financial planning firm.
We now go into the simple steps to get a grip on your personal finances in some detail.
Budget: It is the first step to financial planning, yet many ignore it. It essentially means making a list of all the expenses you have to know exactly where your money is going. Once you know that, you can make certain adjustments to discretionary expenses so that you have a surplus at the end of the month.
Keep An emergency fund: “Have an emergency fund of at least three months if you are a double income family and six months if you are a single income family,” says Vishal Dhawan, Sebi RIA and CEO and Founder, Plan Ahead Wealth Advisor.
Get Yourself Covered: It is crucial to get insured for life and health. Life insurance is required when you have dependents. “The thumb rule for life insurance is to have a sum assured which is 10X the salary of the individual,” says Rupinderjit Singh, Vice President - Retail Health, ACKO General Insurance.
When it comes to health insurance, a health cover of at least Rs 10 lakh is recommended per family member.
First Invest, Then Spend: We all have expenses and we also should be investing for the future. Here, the rule is simple: first invest and then spend, rather than doing it the other way round. Because if you first spend, more often than not you won’t have anything left to invest.
Where To Invest
When it comes to where you should invest, again it is important to keep things simple. There is a lot of information online and otherwise, a variety of products and myriad investment avenues. This after a point, can become overwhelming.
So what do you do? “When you look at personal finance, it is actually very simple. It is nothing but planning your life’s journey. You need to know where you are, you need to know where you are going to reach and what will be the best vehicle for you,” says B. Srinivasan, Director and Founder, Shree Sidvin Investment Advisors.
We cannot say if any investment is good or bad, but the investment that suits your needs and your risk profile is an appropriate one. “The simpler you keep it, the easier it is to follow, adhere to and understand,” says Srinivasan.
Finally, try to understand the product. “At the end of the day it is your hard earned money. Only if you can understand the product, invest in the product, otherwise do not invest at all,” adds Srinivasan.
To sum up, it is good to be knowledgeable and also take the advice of a qualified financial advisor, but try to keep things as simple as you can.