Remember the financial management, Managerial Economics you read at your college, or did you only take the courses that were mandatory for you to graduate like most of us do?
For most people, these classes were pointless just like calculus, trigonometry & engineering drawing. The longer it has been since I graduated, the more disappointed I am about how much less information was not in the curriculum throughout my institutional education.
Everyone tells us to go get a degree, then a job and all will be well but unfortunately, it’s not that easy for you to succeed in life. You need to learn way more about money than what our education system will ever give us. Personal finance is the backbone of almost all success stories.
To save your time and efforts or before you learn from your mistakes, here at TCM we have compiled a set of rules that everyone can follow to ace their finances & move up the ladder of success.
The rules you will never learn in school or college, here goes the list:
1. Buying a Home – Personal Finance
Getting a home is the dream we all have but what delays this dream for most of us is the popular statement “if you want to buy a home you have to save up to 20% of the value for the down payment”.
However, there are a few private lenders for whom this percentage is quite low but they charge higher interest rates. What school fails to teach you is that while higher interest payments may be painful, the financial trade-off between paying more money now and waiting to save up the 20% deposit could be worthwhile.
If you look at the macroeconomic factors in India, over the past decade the appreciation rate of real estate has gone up but the wage levels have remained almost stagnant. So it becomes difficult to start saving up 20% of the home value as it will only increase over the years.
The thumb rule is if you can save the money within 5 years comfortably then go for it else chasing a moving target as the real estate price increases is stupid.
Tip: In India, if you get a property financed (within the home loan category) at a higher interest rate & lower downpayment, you always have an option to switch your loan A/C to any bank after 6 months without any penalty.
For example, if you take a 50 lacs (5-10% downpayment) home loan from any bank at say 10% p.a. After 6 months, you can transfer the whole 50 lacs loan to any standard bank like SBI, HDFC, etc. offering home loans at much lesser interest rates. Though these banks would have denied you the loan due to non-compliance with minimum downpayment clause, in transfer case they can not.
2. Save some cash
Schools teach us to have at least 10% of our income but to be honest this isn’t enough to retire unless you’re earning millions. Though, 10% is good for a start, for many of us with a regular salary a decent savings percentage should be about 25-40 %.
So, you can reduce your expenses and unnecessary costs like instead of having dinner outside have more of home-cooked dinner often & put that money into an RD with a better interest rate.
3. Emergency Fund – Personal Finance
You might not have heard about the emergency funds at school but based on recent statistics (& old Bollywood films 😜) up to 30% of Indians don’t have the funds to cover an emergency of Rs25000. This is alarming as it shows how people disregard the importance of an emergency fund.
What if you lost your job today to a recession (check out more about recession here), would you have enough money to cover your expenses?
The thumb rule is to have at least 6 months of expenses as an emergency fund but we suggest that if you can save more it would be better.
4. Budgeting – Personal Finance
Budgeting is very important in life, yet you won’t hear a single word about it throughout your education. Sadly, this could add to your disadvantage right after graduating especially once you start earning.
Unable to manage your bills and differentiate between needs can lead to one difficulty after the other. Everyone needs to understand how to plan a lifestyle financed by earned income. This includes planning for all bills and still ensuring there’s enough left for necessities such as groceries and savings.
Let’s face it, as much as budgeting is important no one enjoys tracking every single rupee they spent. Instead, you can follow tactical budgeting which involves creating budgets and plans over a long period.
For example, you can list down your needs every month and create a budget with respective costs over the next 6 months. You can then separate the amounts into different accounts to avoid overspending above your budget & occasionally refer to the list to keep the track of your expenses.
5.Compound Interest – Personal Finance
The power of compounding is possibly the best-kept secret. This is the one thing every young individual has to know to properly utilize it to one’s advantage over everyone else. Though they may not achieve their financial goals immediately, they still have an upper hand when it comes to investing. All you need to do is use compound interest by setting aside a small portion of the money and can unlock great wealth that will compound through the years.
Here’s a small calculation to illustrate the power of compounding to you. If someone gave you two options, the first one being Rs 5,000 and the second is a Re 1 that doubles up in value every other day. Most of you would choose the first option but if you do the math the 2nd option would be worth Rs 53.68 Crores within 30 days only. With this, I rest my case on the power of compounding.
6. Credit Secrets – Personal Finance
Most of us right after getting our first credit cards, end up maxing them out & then accumulate a lot of bad debt. They’re forced to pay huge interest which often results in late payments that adversely affect them. What most people don’t understand is the importance of CIBIL Score (credit score) and maintaining a good credit history.
CIBIL score indicates your financial health and helps lenders determine your financial position as an individual. With a proper score (above 760) it’s easier to purchase a house, get a car, a business loan, and also other milestones in the future.
Here’s how to build a credit history and have a proper score all the time:
Get a credit card & always pay your credit bills on time.
Most individuals often think, getting a credit card is a mistake but its importance in building your credit score. It helps build your credit statement as financial institutions record all your transactions and interest payments. Based on your CC bill repayment efficiency, a score is assigned to your name. When you apply for a loan this score also determines the loan amount you can receive and also the interest rate.
7.Insurance – Personal Finance
If anyone is depending on you then you need to get life insurance. This could be your child, spouse, or parents. It is always better to get a term plan rather than any other kind of insurance as you get covered if at all the need arises. However, if there are no financial dependents, get a policy for other aspects and assets you own (always get insurance for your home loan). This includes your health also. So, research well to get different rates and available features and riders before finalizing an insurance plan.
8.Taxes – Personal Finance
Tax is a broad topic and is hardly ever discussed in the school apart from that slab wise income tax calculation in your school maths curriculum. It’s also important to understand how it works if you want to do stay within legal boundaries. Before you get your first salary or tap any sales in your business learn how to calculate the tax rate and applicable ways to save more and minimize your taxes. This will help you evaluate if a job offer meets your financial needs or the appropriate pricing strategy for your products or services. Nowadays, many online calculators will do it for you. Always remember, take-home salary is never the same as CTC and this is the harsh reality of our system. Sounds bad in the beginning but eventually, you get used to it.
Always be careful when it comes to your health, a hospital visit for an injury or a disease leading to hospitalization can cost you a fortune. Without proper health insurance, you may have to borrow money to pay for your medical bills or burdening your close ones who had plans with their money.
So, in case you don’t have a medical cover, get one ASAP. Though most of the employers provide medical insurance nowadays having your medical insurance helps insurers to keep a track of your medical history and in case you opt for insurance at a later stage of life you won’t be burdened with high premiums. Also, try and maintain a healthy lifestyle so as to get better support from your body at a later stage of life.
10. Education Loan – Personal Finance
Student loan debt isn’t always necessary contrary to what most of us believe. If you can avoid it in the first place just avoid it. Look for scholarships or the ones based on financial conditions or other possible ways to reduce this burden as much as possible. Often these heavy education loans take the big chunk of your salary after you start working.
Though in some cases it may be worth taking education loans if the degree promises a high paying career like CAT MBA’s etc.
If you like this article please like, share, and comment down below & let us know if you like any of the above rules or if you know of any other personal finance rule.