Financial management for beginners

By David Muino

Financial planning provides a systematic approach to achieving your life goals while avoiding financial shocks and surprises. It involves determining capital requirements, framing financial policies, and ensuring that scarce resources are utilized optimally. While instilling financial planning habits in young adults can be challenging, following these 10 golden rules can set you on the right path to managing your finances effectively.

Manage Your Money

Managing money isn’t as complicated as it seems. The first step is deciding to save. Regular savings can prevent you from falling into debt traps and pave the way to financial independence. Here’s how to effectively manage your money:

Start with a Budget

Create a detailed budget to track your income and expenses. This helps you understand where your money is going and where you can cut back. Categorize your spending into essentials (rent, groceries, utilities) and non-essentials (entertainment, dining out).

Automate Your Savings

Set up automatic transfers from your checking account to your savings account. This ensures you save consistently without having to think about it. Automating savings helps build a habit and reduces the temptation to spend.

Use the 50/30/20 rule.

Consider using the 50/30/20 rule for budgeting:

  • 50% for Needs: Allocate 50% of your income to essential expenses like housing, utilities, groceries, and transportation.
  • 30% for Wants: Reserve 30% for discretionary spending like dining out, hobbies, and entertainment.
  • 20% for Savings and Debt Repayment: Dedicate 20% to savings and paying off debt. This includes your emergency fund, retirement contributions, and extra payments on any outstanding debt.

Build an Emergency Fund

Having an emergency fund is crucial. Aim to save 3-6 months’ living expenses in a separate, easily accessible account. This fund is a financial safety net for unexpected expenses like medical emergencies or car repairs.

Invest Wisely

Don’t let your savings sit idle. Instead, invest in a liquid fund—a type of debt mutual fund that invests in fixed-income instruments like fixed deposits (FDs), commercial paper, and certificates of deposit. Liquid funds offer higher returns than traditional savings accounts while maintaining liquidity.

Monitor and Adjust

Regularly review your budget and savings plan. Life circumstances change, and your financial plan should be flexible enough to adapt. Make adjustments as needed to stay on track with your financial goals.

Avoid Unnecessary Debt

Credit cards can be convenient but also expensive if not managed properly. Avoid carrying a balance and incurring high-interest charges. If you use credit cards, aim to pay off the full monthly balance.

Set Financial Goals

Identify short-term, medium-term, and long-term financial goals. These could include buying a vehicle, saving for a vacation, purchasing a home, or building a retirement fund. Having clear goals provides motivation and direction for your savings and investments.

Track Your Progress

Use financial apps or tools to track your spending, savings, and investment progress. These tools can provide insights into your financial habits and help you make informed decisions.

Educate Yourself

Stay informed about personal finance. Read books, attend workshops, and follow reputable financial blogs and websites. Understanding financial concepts can empower you to make better decisions and maximize your money’s potential.

By implementing these strategies, you can take control of your finances, avoid debt traps, and work towards financial independence and security.

  1. Regulate Your Expenditure Carefully

If you are always broke before the month ends, it might be because of unexpected expenses. To take control of your finances, you should regulate your expenses, and this is how.

Make Use Of An Elaborate Budget

The budget is a mighty weapon in managing your cash flows. Start by listing all sources of revenue and all classes of expenditure without leaving anything out, like housing, utilities, or groceries, among others.

Group Your Expenses

Your expenses can be grouped as follows:

Fixed Expenses include rent or mortgage, car payments, and insurance premiums that recur monthly.

Variable Expenses include groceries, utilities, fuel, etc., which may fluctuate from month to month.

Urgent Expenses: urgent home repairs or medical bills that require immediate attention.

Non-Urgent Expenses: this includes items like upgrading phones and clothes shopping.

Necessities: necessities include things like shelter, food, and transport that we cannot do without.

Luxuries: These are non-essential goods often bought at will, i.e., eating out, entertainment, and vacations, among others.

Order Your Spending

After categorizing your expenditure you must put them in some order. Necessities should come before emergencies.

Utilize Budgeting Tools

In the actual time, enable budgeting tools to enable tracking expenses. Within their spending habits and remain on track these tools provide personal views. Adopt the Envelope System. This approach helps regulate the cash flow. Initially, allocate a particular sum to each expense category, keeping these in distinct envelopes made of banknotes. For one to further spend from that category, the envelope must be empty.

  1. Maintain a Personal Balance Sheet

A personal balance sheet is an essential tool to determine your financial situation. In this document, you will find out what you own (your assets) and what you owe (your liabilities). Follow these steps on how to make a personal balance sheet:

Itemize Your Assets

Firstly, itemize all your assets. These are anything that belongs to you and has value. The most typical examples of such things include:

Cash and Bank Balances: The money in your checking or savings accounts.

Investments: Record stocks, bonds, mutual funds, retirement accounts, and other investments.

Property: A market price of real estate properties like residential homes, rentals, lands, etc.

Personal Property: This could be valuable stuff such as vehicles, jewelry, electronics, or collectibles.

Other Assets: Include ownership interests in businesses and intellectual properties, among others.

List Your Liabilities

Secondly, list all obligations that are yours to settle, among which are the following:

Mortgages: Provide information about the outstanding balance on a home mortgage or any loan secured by property, including land.

Loans: Name car loans, student loans, and personal loans, among other types.

Credit Card Debt: Please enter the total balance you owe on all your credit cards.

Other Liabilities: Include any other liabilities not mentioned above, e.g., unpaid taxes, medical bills, and outstanding bills.

Calculating Your Net Worth

Calculating Your Net Worth

The difference between your total assets and total liabilities is referred to as your net worth. Use this formula to calculate it:

Net worth = Total Assets − Total Liabilities

Positive Net Worth: Positive net worth refers to situations where the asset base exceeds liability. It implies financial stability and an avenue for growth.

Negative Net Worth: Negative net worth refers to a situation whereby one’s liability exceeds their assets. It denotes financial strain and the need of taking strategic steps to improve one’s financial status.

Track and Improve Your Net Worth

Repay Debts: First, pay off high-interest rate debts such as credit cards because reducing debt is equal to increasing net worth.

Invest Wisely: Look into appreciating assets like stocks, real estate, or retirement accounts. Diversify risk-return investments.

Increase Savings: Save part of your monthly income regularly. Consider opening high-interest savings accounts or low-risk emergency fund investment options for emergency money use only.

  1. Monitor Your Spending: Control your monthly expenses so that you do not get into new debt.

Managing extra cash is super essential for securing your financial future. By smartly investing your surplus funds, you can beat inflation and progress toward your financial goals. Here’s how you can do it:

Identify Your Goals:

Short-term Goals: These could include building an emergency fund, saving for a vacation, or making a big purchase within the next one to three years.

Medium-Term Goals: This might involve saving for a down payment on a house, funding education, or covering other expenses expected in the next three to ten years.

Long-Term Goals: These are typically focused on retirement planning, achieving financial independence, or leaving a legacy, usually over a timeline of more than ten years.

Assess Your Risk Appetite:

Conservative: If you’re not big on taking risks, you might prefer investments that focus on preserving your money, like bonds or fixed deposits.

Moderate: A balanced approach could include a mix of stocks and bonds to balance growth and stability.

Aggressive: If you’re okay with taking risks, you might lean towards stocks and other high-growth potential investments.

Choose Appropriate Investment Avenues:

Mutual Funds: These are flexible and can be customized to match different risk appetites and investment timelines. For example:

Equity Mutual Funds: Great for long-term goals and investors with a higher risk tolerance.

Debt Mutual Funds: Perfect for short-term or medium-term goals, offering relatively stable returns with lower risk.

Hybrid Mutual Funds: These blend equity and debt investments, providing a balanced approach suitable for medium-term goals.

Diversify Your Portfolio:

Spread your investments across different types of assets and industries to reduce risk and increase potential returns.

Monitor and Adjust:

Review your investment portfolio regularly to ensure it aligns with your goals and risk tolerance. Make changes as needed to stay on course.

By carefully planning and investing your extra cash, you can effectively bridge the gap caused by inflation and work towards reaching your financial dreams.

5. Creating Your Personal Investment Portfolio

Creating Your Personal Investment Portfolio

We’ve got you covered with a step-by-step guide to help you make a solid and diverse investment plan:

Spread Your Investments Across Different Types:

Stocks: Investing in stocks can yield serious returns over time, helping combat inflation and grow wealth. To spread out the risk, mix individual stocks and equity mutual funds.

Bonds and Debt: If you’re after stable returns with lower risk, then bonds, fixed deposits, and debt mutual funds are the way to go. These are great for safeguarding your capital and generating a steady income.

Cash: It’s wise to keep a chunk of your portfolio in cash or cash equivalents (like money market funds) for quick access and to cover any short-term needs.

Consider Your Investment Timeline:

Short-Term (1-3 years): If you’re looking at a shorter timeline, think about low-risk investments like savings accounts, fixed deposits, or short-term debt funds.

Medium-Term (3-10 years): For this period, a balanced approach with a mix of equity and debt investments can give you growth while managing the risk.

Long-Term (10+ years): When you’re in it for the long haul, focus on equities and equity mutual funds to maximize growth potential and take advantage of compounding over time.

Figure Out Your Comfort with Risk:

Getting a handle on how comfortable you are with market ups and downs will help you decide where to put your assets. Generally, the longer you plan to invest, the more risk you can handle.

Strategically Split Up Your Assets:

Distribute your investments across different types based on your goals and risk tolerance. For example, a common strategy is to put a higher percentage into stocks when you’re younger and gradually shift to debt and cash as you get closer to your financial goals.

Keep Your Portfolio in Check:

It’s important to check in on your portfolio regularly to make sure it’s still in line with your desired asset allocation. Rebalancing means selling off some assets and buying others to keep your target mix, especially after big market movements.

Stay in the Know and Adjust:

Keep an eye on market trends and economic conditions. Make changes to your portfolio as needed to match your financial situation, goals, or risk tolerance.

By spreading out your investments and keeping your portfolio balanced, you can effectively handle risk, maximize returns, and reach your financial goals over time.

Planning for Retirement

So, you’re thinking about retirement? Smart move! Planning ahead can make a world of difference in ensuring a comfy and financially secure future. Let’s break it down into simple steps to help you plan effectively.

Set Your Retirement Age:

First things first, figure out when you want to retire. Knowing this will give you a clear timeline for your retirement planning and savings strategy.

Estimate Post-Retirement Expenses:

Next, calculate your expected monthly expenses after retirement. Think about things like living costs (like housing, utilities, and groceries), healthcare expenses, leisure and travel, inflation, and any outstanding debts or obligations.

Calculate Your Retirement Corpus:

Based on your estimated monthly expenses and the number of years you expect to be in retirement, calculate the total amount you’ll need to save. For example, if you anticipate needing $4,000 per month for 20 years, you’ll need around $960,000, factoring in inflation and other variables.

Determine Your Savings and Investment Needs:

Use retirement calculatorsto figure out how much you need to save and invest regularly to reach your retirement goal. These tools can help you consider factors like current savings, expected investment returns, and inflation rates. For instance, if you start saving at 30 and aim to retire at 65 with a goal of $1,000,000, a retirement calculator can help you work out the monthly or yearly contributions needed, assuming an average annual return on investment.

Choose Appropriate Investment Vehicles:

Consider contributing to retirement accounts like 401(k)s, IRAs, or Roth IRAs, which offer tax advantages and are specifically designed for retirement savings. Also, think about investing in a diversified mix of assets, such as equities, bonds, and mutual funds, to balance growth and risk. And hey, if your employer offers a retirement plan with matching contributions, jump on that opportunity!

Regularly Review and Adjust Your Plan:

Every so often, take a look at your retirement plan to make sure you’re on track to meet your goals. If needed, tweak your savings rate, investment strategy, or retirement age. For example, if you get a raise or bonus, think about putting some of it towards your retirement savings to speed up your progress.

Monitor Inflation and Adjustments:

Keep an eye on how inflation affects your retirement savings and adjust your contributions as needed. What might seem like enough now might not cut it in the future due to rising costs.

By getting an early start and staying disciplined with saving and investing, you can build up a solid retirement fund to support a comfortable lifestyle in your golden years. And remember, regularly reevaluating your plan and making necessary adjustments will keep you on the right track to reach your retirement goals.

Manage Your Debt Wisely

Debt management is a very sensitive matter in your financial life because it easily traps people in debt. In case you manage your debts wisely, you are able to reduce financial stress, thereby improving your financial health. Here is a comprehensive guide for managing your debt wisely:

Pay Up High-Interest Debts First

Start the pay up with the high-interest debts, like outstanding credit card balances. These debts keep on increasing in amount with a lot of interest that is added every day.

Strategy: Follow the avalanche method by paying off your debts with the highest interest rates first while paying the minimum to other debts. It will reduce the total interest amount paid.

Limit the Use of Loans:

Loans should be used in times of urgent need only. If you are buying an asset whose value depreciates with time, such as a car or some electronic device, then it is advised not to use loans for those items.

Guideline: Ask yourself if the loan will be used to purchase an appreciating asset, like an education or a home, which may gain value over time or have long-term benefits.

Transfer Loans to Lower Interest Platforms:

Look for lenders that will charge you a lower interest rate and transfer your high-interest loans to them. This saves you money on your interest payments and enables you to pay off your debt faster.

For example, balance transfer credit cards usually offer a 0% interest introductory period. If you can pay off the transferred balance within this period, then you will save on interest charges.

Plan Your Repayment:

Formulate a structured repayment plan to reduce your debts systematically. Set realistic monthly payment goals and stick to them.

Budgeting: Incorporate your debt payments into your monthly budget, followed by other necessary expenses.

Avoid New Debt:

Resist new debts that have the potential to hinder your repayment process and, hence, increase your financial burden.

Discipline: Practice financial discipline by living within your means and by not engaging in unnecessary purchases.

Consider Debt Consolidation:

If you have several debts, look into rolling them into a single loan at a lower interest rate. This simplifies your payments and can save you interest in the long run.

Example: You can roll your debts into a personal loan, home equity loan, or other types of loans at a considerably lower interest rate than the one charged by your credit card.

Seek Professional Help:

If you are finding it really hard to manage your debt, consult a financial advisor or a nonprofit credit counseling service for advice. The financial advisors or counselors will be in a position to offer you personalized ideas and strategies for regaining control over your finances.

Resources: Look for a wide selection of organizations offering free or low-cost counseling services.

Check Your Credit

Periodically, check your credit report to know that everything related to your financial position is shown correctly. You can challenge inaccurate information that may harm your credit score.

Credit Score: A good credit score can serve to lower your interest rates on loans and credit cards.

By using these approaches, you can take charge of your debt, reduce financial stress, and develop a path toward a more secure financial future.

Get Your Risks Covered

Insurance is a potent tool for shielding your wealth and income against events that might come as surprises. By ensuring adequate coverage, you will be safe in your financial well-being and grant peace of mind to you and your family. Here’s how you can effectively cover your risks.

Opt for Term Insurance:

Life Coverage:Term insurance provides considerable life coverage at a low cost. It ensures that your dependents are completely safe if you were to pass away unexpectedly.

Affordability:Term policies are less expensive than either whole life or universal life insurance, enabling you to have higher coverage at a lower premium.

Coverage Needs: The amount of coverage needed will include outstanding debts of your family, future education expenses, and expenses for daily living needs.

Get Health Insurance:

Medical Expenses:A good health insurance policy is a must to shield you from out-of-pocket expenses, such as hospitalization, surgical procedures, and continuing treatments.

Preventive Care:Many health insurance plans also provide preventive care, such as yearly check-ups and vaccinations, to keep up your total health.

Family Coverage:Consider a family floater plan that covers all the family members under a single policy to economically ensure all are covered.

Ensure Sufficient Coverage:

Assess Your Needs:Periodically check and revise the amount of your insurance coverage to ensure it is in tune with your present financial circumstances and lifestyle.

Inflation Adjustment:Bear in mind inflation while ascertaining the amount of coverage so that your policy would sufficiently address your expenses in the future.

Policy Riders: Attach riders to your policies, like riders for critical illness or death benefit from accidents, to enhance your coverage.

Diversify Your Insurance Portfolio:

Property Insurance: Protect your home and other valuable assets from risks such as theft, fire, and natural disasters by investing in property insurance.

Disability Insurance: Protect your income by taking out disability insurance that provides financial support in case of inability to work due to illness or injury.

Liability Insurance: Consider liability insurance to protect yourself from legal claims and lawsuits, which can be especially devastating if you have a business or substantial assets.

Consulting a Professional:

Insurance Advisor: Engage in a partnership with an insurance advisor or financial planner to review your insurance requirements and make the right policy choices for you.

Personalized Solution: A professional advisor will give you individual advice that is best for you based on your distinct situation and long-term financial objectives.

By selecting proper insurance coverage and maintaining coverage, you will protect your wealth, establish financial stability, and provide a future that is safe for you and the people you care about.


If you are confused about where to start investing, getting advice from a reliable source will add clarity and confidence to your investment choices. Mutual funds are an excellent way to diversify and benefit from professional investment management. To help you get started, choose a website that offers a paperless and hassle-free investment process. The website should be user-friendly and designed to simplify the investment process, with all personal and financial information secure.

Once you have created an account, define your investment goals—short-term, medium-term, or long-term—and go through a risk assessment that will determine your risk profile. This data will help you select the best mutual funds to suit your comfort level and your financial goals. You will have to go through an electronic Know Your Customer (e-KYC) process online, which is the verification of your identity. This is completely paperless and can be completed in under five minutes, which is quite easy and convenient.

After you have completed your e-KYC, you are ready to invest in handpicked mutual funds that are curated by experts. These have been chosen for performance and their suitability across investment goals and risk profiles. When you diversify your investments across different mutual funds, it spreads the risk and enhances the returns, thus mitigating the impact of poor performance in any one of them. You must review your investment portfolio at regular intervals, which is an important aspect, as this ensures it continues to remain aligned with your financial goals. ClearTax provides you with tools and insights to monitor and manage your investments, making changes as necessary based on changes in your financial situation, goals, or market conditions.

By following these steps, you can take control of your finances and work towards a secure financial future. Investing through ClearTax offers the dual advantage of professional management and a streamlined, user-friendly experience. Get started investing today and build a foundation for long-term financial success.

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