Personal finance: Planning and management

Mukesh Agrawal, IPS (Retd.)

(He can be reached at amukeships@gmail.com.)

Skills and wisdom in planning and managing personal finances are not acquired overnight; they develop gradually over time. The foundation of financial discipline is laid during one's upbringing, where family values and prudent financial practices shape a child's mindset. As individuals grow and enter professional or business life, these early influences strongly affect how they handle their own income. Unfortunately, many young people overlook the importance of personal financial planning in their pursuit of career growth, promotions, and higher pay with added perks. The reality often emerges in the late forties or early fifties when adaptability to new careers is limited and financial pressures rise due to children's education and other financial commitments.

Handling personal finance is more a question of the mindset and beliefs around money, the importance of developing a positive relationship with wealth and overcoming limiting beliefs, and taking control of financial destinies by seeking out opportunities, learning from mistakes, and continuous education about money. In this context, one is often reminded of the book "Rich Dad Poor Dad: What the Rich Teach Their Kids about Money That the Poor and Middle Class Do Not!" written by Robert T. Kiyosaki and Sharon Lechter.

Authoritative studies highlight several recurring challenges in personal financial management. Risk vs. return profiles remain a concern as individuals often misalign investments with their true risk appetite, ranging from conservative (bank deposits) to moderate (mutual funds) and aggressive (equities). The "Consumption Wave" reflects a behavioral tendency to save what is left after spending, driven by instant gratification and excessive focus on wants over needs. Debt servicing and management pose technical and psychological challenges, as high EMIs, interest rate changes, and long loan tenures can strain long-term stability. Lack of emergency preparedness leaves many vulnerable during income disruptions. Inadequate provision for health and welfare, including insufficient insurance for medical emergencies or the loss of the primary breadwinner, undermines family security. Behavioral biases such as loss aversion, overconfidence, and herd mentality impair decision-making. Financial Literacy Gaps widen the knowledge-action divide, while inflation impact steadily erodes purchasing power, underscoring the importance of the Time Value of Money (TVM).

Key issues in personal finance management focus on the balance between income, spending, savings, and long-term security. A few factors, like loss of income, uninsured losses, frequent or unplanned borrowings, poor tax planning, changes in life cycle needs, external economic changes, etc., are directly linked to financial vulnerability. Financial literacy is more like a life skill. Financial planning involves preparing for key milestones such as marriage of self, children's education, home ownership, retirement, emergencies, and estate planning. Core elements include cash flow management, tax planning, investments, insurance, retirement planning, and debt management. Common mistakes include unnecessary spending, careless credit card use, ignoring regular savings, and making investment decisions based on incomplete knowledge or imitation rather than informed judgment.

Financial planning is a systematic and ongoing process that starts with assessing one's current financial position and setting clear future goals. It includes selecting appropriate investment options, evaluating alternatives, creating a practical action plan, implementing it effectively, and reviewing it periodically. Flexibility is vital. An investment such as in land or equity need not be held forever. Timely exit and reinvestment can enhance asset value using the same capital and gains. Sound planning also requires a balanced mix of assets and liabilities. To beat inflation, investors should focus on real returns, use suitable instruments, and adopt disciplined strategies like regular investing for long-term growth and financial stability.

Building wealth is a gradual process that requires clarity and discipline. Clear financial goals should be specific, simple, measurable, realistic, and time-bound. An individual's investment portfolio depends on these goals along with risk appetite, investment horizon, and priorities. Portfolios may allocate varying weightages to assets such as debt, equity, gold, real estate, and fixed-income instruments. Financial goals can be short-term (within one year), medium-term (one to ten years), like buying property or upgrading skills, and long-term (beyond ten years), such as retirement or children's marriage. Investment strategies should match each goal's time horizon. Long-term goals benefit from diversified asset allocation to enhance returns and manage volatility. Investors must balance security, returns, liquidity, income, and growth while exercising due diligence, especially where unusually high returns are promised.

Money management goes beyond income alone. It reflects the overall financial position, including income, expenses, assets, and liabilities. Effective money management rests on three pillars: systematic record-keeping of income, expenses, assets, liabilities, and financial documents; careful budgeting of expenses; and regular savings. Savings mean setting aside money for future needs, and maintaining up-to-date accounts helps in understanding one's true financial performance.

One has to get in the mindset of saving first and spending later. Warren Buffett, one of the world's most successful investors, has said, "Don't save what is left after spending; spend what is left after saving."

To manage money effectively, unnecessary expenses must be trimmed while prioritizing essential needs. Needs include unavoidable household expenses such as utilities, housing rent or loan installments, groceries, healthcare, transport, insurance, and education. Some conveniences that simplify daily life may also be treated as needs. Wants include discretionary spending on entertainment, travel, gifts, and celebrations, which should be funded judiciously. Wastes such as excessive spending on alcohol, smoking, gambling, or indulgences beyond one's means must be minimized, as they erode finances gradually. The guiding principle should be: "Spend on needs first, wants later, and waste never." ".

Envelope budgeting, where money is set aside for specific purposes, is ideal for beginners. Digital tools like Excel or Microsoft Money can also help track income, expenses, savings, and investments efficiently.

Designing an investment portfolio involves deploying savings across a mix of financial and non-financial instruments to generate higher returns over time. Each investment carries a different risk-return profile and may be short, medium, or long term. Decisions should be guided by liquidity needs, future financial requirements, and life stage. Younger individuals with fewer responsibilities and higher liquidity can benefit by allocating more funds to long-term goals like retirement, thereby allowing compounding to work effectively. A sound investment strategy aims to balance risk and return, minimizing risk while maximizing returns through diversification rather than concentrating investments in a single avenue.

A well-diversified portfolio should address three key objectives. First, protecting purchasing power against inflation through assets like gold, silver, and real estate. Second, generating steady and relatively low-risk returns through fixed deposits, bonds, post-office schemes, and debt mutual funds. Third, enabling wealth creation by taking measured risks through equities and equity mutual funds. Allocation among these assets depends on risk tolerance, age, and investment horizon. Retirees generally prefer stable, income-oriented investments, whereas younger investors can afford greater exposure to growth-oriented assets, gradually shifting toward safety as retirement approaches.

Planning and Managing Debt: Debt, loans, and credit point to the same thing. Debt should be used to stabilize your finances. One should not go unplanned or unprepared for loans. Tracking debt and their repayment schedules is very important, and one should stick to them, even for credit card debts. Debt, if not managed well, leads to vulnerability to financial risks.

Financial risk is an unavoidable part of life, but its impact varies from person to person and across situations. The extent to which risks affect an individual depends on vulnerability, or how susceptible one is to potential financial shocks. While risks cannot be eliminated entirely, many can be reduced or avoided through prudent money management and proactive financial planning. Creating an emergency fund is one of the most effective ways to protect income against unexpected events. Insurance further helps by transferring major financial risks that could otherwise result in substantial losses. If risks are not properly managed, they can weaken financial stability and expose individuals to additional risks and compounding losses over time.

Thus, personal financial planning and management are lifelong disciplines that demand awareness, discipline, and adaptability. Sound financial habits protect individuals from future vulnerabilities and help achieve long-term life goals with confidence. Financial literacy is not optional but essential for bridging the gap between intention and action. Ultimately, thoughtful planning, regular review, and balanced decision-making enable financial security, peace of mind, and a dignified quality of life, especially in the post-retirement years.