PDCA for personal finance

Plan Do Check ActP-D-C-A (Plan – Do – Check – Act) is a methodology very popular in business circles with respect to business growth. Let’s see how one can apply this methodology to personal finance.

Every person has certain ambitions in life which drives him to work hard and earn money. So note down your objectives, it could be anything like buying a house, buying a car, going for vacation, wealth generation for retirement etc.

So how do one achieve those objectives?

Plan

Identify different investment avenues to suit your risk appetite. It could be equity, mutual funds , fixed deposits, property etc. Now establish the income you will generate by allocating the funds in different instruments. This is the first step of P-D-C-A i.e. ‘PLAN’ your finance. This can also be done with the help of your financier advisor. But make sure to involve your family members also in the planning process, after all you cannot enjoy the achievement without involving your near and dear one’s.

Do

Make a consistent effort to adhere to your plan. e.g. if you have decided to start a SIP (systematic investment plan), do not postpone it to next month and if you have already started one make sure that you don’t default. This is the second step i.e ‘DO

Check

Keep a tab on your investment portfolio, review if everything going as per plan. No need to check for share price or mutual fund balance on a daily basis but periodic review is a must. Decide on review intervals or triggers and stick to it. It might be once in a quarter or when there is sudden change in share market or increase in your salary or making one time big investment etc. This is the ‘CHECK’ stage.

Act

Once you review your portfolio, take corrective actions, if required. You may have to implement changes in your investment strategy to maintain the balance. It may be anything like increasing you SIP installment or changing your exposure to equity etc. This is ‘ACT‘ stage.

Financial planning is like a marathon, all 4 stages are recursive in nature. Following these stages will definitely help you to achieve your financial goal in more professional way.

Is your debt good or bad?

Is taking loan is really a bad thing? Are all loans bad? The answer to these questions depends on the type of loan you are taking. First let us understand what the difference between good debt and bad debt is.

When you are borrowing money for buying something which will appreciate over the period or act as catalyst to generate extra income then that may be called as good debt. The most common example of good debt is home loan. You borrow the money for building home that will appreciate over the period. It will save you rental income, it will give you tax benefits. In short you are using loan money for building the asset at present cost which will appreciate in the future. Gone are the days when people use to save money and purchase / build houses without taking any loan. For that also, there were varied reasons.

1. Home loans were not easily available,

2. Interest rates on home loans were too high.

Now a day’s easy access to home loans, better income tax benefits makes home loan better instruments for wealth generation

Another example of good debt is education loan. You are investing money to complete your education which in turn will create better job/ business prospect for you. It will fetch better income for your family.

Someone can take a loan to start his own enterprise / business also categorized it into good debt. However one should be cautious to check your risk appetite before applying for a loan.

Before taking a personal loan, ask yourself whether loan money will be used for fulfilling the need or attaining desire goals. E.g. you might take personal loan for medical emergency. This is your need. You cannot compromise on your health. You have to raise money for it. But if you are taking a personal loan for buying costly mobile, imported gadget this is your desire. You should stay away from buying such things on loan.

If you are using debt money for buying depreciating assets, it can be treated as bad debt. Car loan, personal loan for buying consumer durables, going on vacation and then paying the money by choosing an EMI option etc. can be considered as bad debt. In the medical profession, doctors always say prevention is better than cure. Same thing applies for bad debt also. As far as possible try to avoid taking these type of loan. Even if you have taken it, give preference to closing these loans at earliest. These loans are one of the biggest hurdles in wealth creation. Not taking a loan for a vacation doesn’t mean cancel your dream vacation. The only thing one has to do to plan the vacation well in advance. Set goals for vacation, calculate approximate expenses, start saving towards this goal. Once you have accumulated the money, enjoy debt free vacation. It will be more enjoyable and relaxing. Remember the golden rule: Invest today and spend tomorrow, don’t spend today and (over) pay tomorrow.

What is I and Finance?

I and Finance is an endeavour to simplify finance for everyone.

Money should not be your primary or most important goal. Money cannot buy you all the happiness, but if used wisely it will surely work as a medium for a happy life for you and your dear ones.

Unfortunately the foundation of our education – schools – don’t teach much about personal finance unless of course you opt for a Finance course as a career choice. This blog emphasizes an educational approach to personal financial management in very simple, easy-to-understand way for non-finance people.

Let us start our journey by busting some myths about personal finance.

Personal finance management is required only for the uber-rich

It is required for everyone irrespective of monthly income. In fact it is more important if one’s income is less. Such people need to manage their funds more smartly as their risk-taking capacity is comparatively lower than that of higher-net-income people.

You need a certified financial planner for financial planning

You really do not want to let someone else manage and in a way control all your hard-earned wealth, do you? Personal financial planning is not rocket-science. It is just like driving a bike or car; you do not really require to know everything about the its internals, but all you need to know is how to drive it and have good knowledge of traffic rules. For financial planning too, you are not required to understand all the fancy jargon of finance world but you should know how to build a good portfolio and what are the best practices that need to be followed. A paid financial adviser will help you with servicing of your financial engine, but how to build your finance prowess ultimately lies in your hands.

An increase in salary will make a person financially stable

Wealth generation in not only depends on your salary but it also depends on your financial habits, that is, how you manage your wealth, what are your liabilities, your lifestyle, spending habits etc.

Personal finance management is a time-consuming process

No, it does not take too much time. The only requirement for good personal finance management is a systematic approach, a periodic review of your financial goals and taking corrective action, whenever required. Do not become too greedy about your finance. Do not try to remember every penny you are spending, but keep track of significant spending details. Also, simply watching your financial details everyday does not take you anywhere.

On a home loan front, the bank only deducts interest component in the initial period

When someone is paying an EMI (Equated Monthly Installment) on a home loan, he is paying both, the principal as well as the interest component. In the initial period, the outstanding loan amount is high, so the interest proportion is higher based on the outstanding loan amount. We developed some easy to use and visually rich personal finance calculators to help you quickly calculate interest and principle components for your EMI.

Taking an insurance for saving income tax

Insurance is mainly bought for securing you and your family’s future against some unexpected event. Generally life insurance and medical insurance products offer tax saving. Remember tax saving is a secondary benefit of these insurance products. Do not take any insurance product just because it will save you some tax. Ask yourself – why you need to buy a particular insurance product?

Throughout its journey, I & Finance aims to give you detailed insight into various aspects of personal finance and help you take better and calculated financial decisions.