Finance seems to scare many of us and we always struggle with personal finance. But this is important for future. Govt. and Insurance companies may refuse the services you expected to get from them. But your savings will keep you going during such rainy days.
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So, what is it? Simply, personal finance is how you manage your personal income, expenses & savings.
You have 3 key areas in your finance management. Those are: Income, Expenses and Saving. There are several options for optimizing those areas of your own finance.
- Income: increase your monthly income by extra works, add another source of income like passive income, start multiple career etc.
- Expenses: decrease your unnecessary expenses, make synergy of your expenses, opt for less luxurious options etc.
- Savings: you can save daily, weekly or monthly; you can save on various investment options.
I am not asking you to sacrifice today for better future. Because we don’t know the future. We cannot be certain that we will enjoy in future by sacrificing today. So, finding the balance of present and future is the goal for personal finance.
Personal Finance Example
For example, you earn $100, spend $70 and save rest $30. If you convert this into percentage you save 30% of your earnings. If you keep doing that on everyday, you will have $7,950 at end of a year. This is a simple plan for personal finance.
What if you put your money in working. Your money will grow. We used to say, Time is MONEY! Actually it truly is. In Finance, it is called time value of money.
Say, you’re now 30 years of age and you have decided to save $1,000 per month in a pension scheme giving 10% annual return. You continue to save till 40 years’ of age and stop saving. But you kept the money in bank giving 10% annual return for next 10 years.
On other hand, your friend, wants to enjoy life to the fullest. So he doesn’t bother to save when he is 30. Instead, he has planned to save $2,000 per month when he will reach 40 (double than your amount) in similar pension scheme giving 10% annual return for 10 years.
So, whose savings at 50 years of age would be higher? As your friend saved double amount, you might think your friend will have more money at 50 years of age.
Your money would be higher than your friend’s by 30.8%
So… Let’s start saving now and let time multiply your savings.
Retirement plan is important, unless you want to work and earn till old age. But there is no best retirement plan that is suitable for everyone. You need to find the best plan for your retirement.
What should be the size of retirement pot?
Simply, it depends on your preferred lifestyle. But there is a thumb rule, that is: you’ll need 25 times of your annual expense. Surely you can know your annual expenses depending on your life style.
Why 25 times?
25 times of your annual expense is enough money which can generate enough returns to carry you through in perpetuity (till you start for next world).
Say, you’ll need $50,000 per year when you retire. You will spend this to maintain your lifestyle, starting from buying food to toothpaste to weekend parties to medical, vacation trip, gift etc.
So, your Retirement pot = $50,000 X 25 = $1,250,000
As you know how much you need for retirement, you have few options for saving.
The most reliable and least risky option is saving in pension fund or monthly pension scheme of a Bank. You can take some risk for higher return in stock market, real estate etc.
So, what do you think? How will you prepare for retirement? Please share in comments.