Accounting for your personal finance
Accounting plays an important role in many different aspects of life, perhaps much more than you can even think. In Hindu culture, we have Chitragupta, a Hindu, god assigned with the task of keeping complete records of actions of human beings on the earth and punish or reward them according to their Karmas. In social events and marriages, we make a note of who is giving what so that we can reciprocate accordingly. Accounting goes much beyond just maintaining business books and the basic principles of it can be applied to many aspects of our lives, especially personal finance. Not, surprisingly, we find many of them to be a perfect fit for personal finances. If only, we could start seeing our own personal finance as that of a business enterprise, things could be very different. Here are some thoughts on these lines…
Record all your cash flows
Khata or chopdi is something every Indian is familiar with. This was made famous this year when our Finance Minister, Nirmala Sitharam, carried a red one to the parliament to present the Union budget, which basically is nothing but a statement of inflows and outflows. How effectively you track and manage your cashflows is the fundamental building block of success in finance, be it a nation, business or just your personal finance.
The primary idea is to know where your money is coming from, where it is going and also when all this is happening. With this understanding, you can uncover many hidden things, practice control, manage money better and plan for the future. Why we don’t do it? Only because of a physiological barrier; the fact is that it hardly takes about ten minutes a week record and update your cashflows.
Make and follow a budget
Every small shopkeeper /cart seller /pan-wala in India, irrespective of how educated one is, likely maintains a budget. He understands that having controlled spendings is key to earn profits. At a personal level, you too need to defined budgets for different heads of your expenses. With cash flows being tracked, this can be pretty easy to do. Having a budget helps in many ways. With a spending plan, you ensure that you always have money for important things. It will help you save more, avoid or reduce debt, basically organise and control money and put it to good use.
Track your key personal finance ratios
Evey equity investor would have heard of ratios like PE / PB / Dividend Yield, ROI, etc. Wouldn’t it be interesting to about tracking your own personal finance ratios? We would encourage you to track, every month, few key ratios like — Savings ratio, Liquidity ratio, Debt to Assets ratio, Asset Allocation ratio, Debt Servicing ratio, Life Insurance Coverage ratio and Solvency ratio. Tracking these ratios can do wonders of your understanding of your finances and how you manage them. It would be hard to talk about these ratios here and we encourage you to read more on them.
Regularly evaluate your portfolio composition
When it comes to corporates, they are very particular in how they manage and hold money. Clearly, they understand that every rupee has to be smartly allocated and used to serve its purpose. On a personal front, why don’t we too see money with the same respect? We just talked about the Asset Allocation ratio, which, is the ratio of equity assets and debt assets in your portfolio.
This is only the starting point for understanding your portfolio composition. How your investment portfolio is constructed and managed will go a long way in determining how much financial success you can achieve. Investment in asset classes and products that deliver the maximum, post-tax, real returns (above inflation) are the ones that add to your wealth. Anything less and you are practically losing money even if you do not see it. Your portfolio should be designed to meet your financial goals and other objectives, both short and long-term in nature.
Have a financial plan and review it periodically
Every business or company has business targets, goals and long-term vision statements. As employees, we too have our monthly and yearly targets which we strive hard to achieve. But have you set targets for yourself on your finances? A financial plan is a document that attempts to give the path from your present to the future, intending to achieve your goals.
Having a financial plan is like having a navigation system on your car, showing you the path to reach your destination. Defining your goals, mapping your investments and regularly tracking them, will ensure that your destination is closer than you think.
Have a plan to reduce Debt
Recently Mukesh Ambani announced that Reliance Industries had become net debt-free. Why was debt reduction so important? Talking about personal finance, reducting debt gives us a lot of freedom in our personal choices. With no EMIs, we can save more, build more wealth, take more risk and basically be free from the stress of having to pay regular EMIs.
Many people would have realised the benefit of being debt-free during this Covid-19 crisis. If you have debt, especially the bad ones that are not for appreciating assets like business or home, we suggest you draw a plan to reduce the same asap!
Keeping business records separately
Every business keeps a clear separation in books of different entities. Not just that, companies also keep a record of different cost and profit centres. It would do us a world of good to small business owners if we could keep our business interests and our personal finances separate. This begins by having separate bank accounts, separate tax returns and not mixing expenses. You can also start paying for your self by transferring a salary for yourself from one account to another.
Another idea is to not mix personal or family relationships into business as, more often than not, it ends up hurting both, the business and the relationship. Also, it would be great if we do not put any our personal assets as guarantees to business loans and have adequate insurance covers too. In a worst-case scenario, your personal life should be protected from your business losses.
Seek expert guidance and help
Every decent business setup seeks guidance from experts such a chartered accountant, company secretary and legal advisor. Many businessmen make the mistake of treating your accountant as also your personal finance and insurance advisor. We need to understand that these are different domains and require different skill sets and expertise. Further, with ease of operating investment accounts and investing directly, many people think they are doing a great job by eliminating the distributor /advisor from the process.
Why do we seek help guidance for everything else in life, including exercising and dieting, except the most critical one — your finances? The operation convenience is perhaps only a fraction of the great value that an expert brings to your life’s journey of financial wellbeing. Like any business, we would advise you to choose the right financial products distributor /advisor in this journey of yours.
Get in touch for guidance on personal finance
or email us your query at rege22866@gmail.com
