Pocket, Protect, Plan, Play: The 4 Ps Of Personal Finance

personal finance tips

Personal finance involves making decisions around saving, investing, spending and earning. It might sound simple enough, but people say it is easier to find a job and make a living when compared to managing your earnings!

Money management skills are of the utmost importance – there are numerous stages in your life that involve heavy capital outlay such as having a family, buying a home, higher education, retirement, healthcare, and more.

Therefore, habits such as saving are essential to master, and combining good habits with building your financial knowledge and planning skills will help you make the best personal finance choices.

Some important concepts around Personal Finance

#1 – Planning

The first step towards mastering personal finance is Planning – i.e, assessing your earnings and expenses. You should account for any major expenses in your timeline and save accordingly.

You might want to determine a percentage from your earnings, spending and savings, such as 10%, and put this aside every month. To make the most of your savings, invest them to get attractive returns. Another option is margin lending, which is a loan that helps you pay for stocks and other assets.

You should also begin to set goals. These could be long-term, short-term or medium term and will help you understand what you need to achieve a specific financial level for life events ranging from taking a holiday or reaching retirement.

#2 – Investing

Where possible, you should look to invest your hard-earned money to earn a return to help you reach your investment goals. The general rule to investment is high risk/high reward and vice versa. Make sure you research the past performance of the funds/sectors/stocks you wish to invest in, and study where you think they’re headed.

Before making any investment decision, get acquainted with the risks and events that could affect your investment. You should also diversify your investments to avoid concentration risks.

Overall, it’s crucial to analyse your risk appetite and invest accordingly. If you are risk averse you should avoid high risk investments or keep them to a minimum. Age tends to play a major role in these decisions, younger generations are likely to happily take on higher risks than those in later years.

#3 – Asset Class

Broadly, assets can be divided into two categories: defensive and growth assets. The assets having low risk-return ratio are defensive, and the assets having a high risk-return ratio are growth assets.

Then, there are different asset classes where one can park their savings e.g. fixed interest deposits, real estate investments, shares or fixed interest market, alternative investments, and so on.

Important factors to consider before choosing your asset class is the risk-return ratio, time period, entry exit load, liquidity, tax implications, to name a few. Ideally you should own assets which will most likely increase in value and have a low maintenance cost.

#4 – Portfolio Allocation 

Depending on your age, investment goals, and risk appetite, you need to allocate the different assets within your portfolio. For example, real estate is less volatile than stocks and it could make up a major portion of a portfolio for someone who is risk averse, while a portfolio that is heavy in shares will come with a greater level of risk.

Real estate is one of the most popular investment choices in Australia, and this asset class has delivered consistent returns over time. However, the recent interest rate hike in Australia could mean higher repayments on home loans making real estate less desirable for investors. With this information in mind, an investor may want to move into, or out of, a property-heavy portfolio.

You might want to get professional advice regarding how to allocate money in your portfolio, although there are many websites that  make financial education more accessible and some sites also provide a hands-on platform to trade the financial markets.

#5 – Tax implications

Understanding taxation is a huge component of building wealth. For instance, you need to remember that investment income is taxed as per your marginal tax rate. So – dividends from stocks, interest from deposits, rent from property, gains from sales are all subject to tax implications.

Capital gains tax is applicable once you sell your shares while rental property owners are entitled to a number of tax exemptions in Australia. There’s so much to know and it’s definitely wise to develop this understanding for yourself, or hire a professional.

#6 – Portfolio Tracking

Regular reviewing and tracking of your investments is necessary to gauge portfolio performance. You can draw a personal balance sheet and check it regularly, or use Personal Finance apps that also keep you abreast of news and latest events and flag a concern if something goes wrong. These apps are hugely popular, and their market size is expected to witness huge growth by 2027.

Final thoughts

Unfortunately, if not done properly, managing your earnings can lead to all of your hard-earned money going down the drain. Therefore, it’s super important to understand the basics of budgeting, saving, and investing so that you can lead a financially-secure life.

MORE – 4 Ways To Save The Most Money Next Year

MORE – Money: How To Create Better and More Sustainable Habits

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