In our day to day life, one often heard phrase is ‘Money and Finance’. Then, it is important to understand this phrase better. Here is the effort to discuss Money and Finance for beginners.
Money is what we understand as cash (notes, coins and now digital money) which is the medium of exchange and measure of value for transactions. Every item or service we get is measured in terms of money value. So, we all need to have money for getting what we want to buy – goods or services.
No one keeps all their money as cash at home. We all know that we can keep money in banks, investments in Mutual Funds, stock markets, Gold, real estate or even Insurance. For this, one needs to understand these avenues for money management and benefits to match them with our personal needs and goals. This process of managing money is called Finance.
That brings us to the need to understand management of money through various avenues. We also include borrowing and lending as part of money management. We keep hearing people getting into trouble by investing money in market or real estate and so on which, more often is due to lack of understanding or just imitating what others say or do without analysing if it suits our current income, commitments and future goals.
Today, there are many ways of managing money and would feel very complicated unless we understand the fundamentals. Once we understand money management concepts, we would be in a better position to access expert services in each of these areas.
Whatever we are discussing is equally true for individuals, businesses and also Governments. A business will have to shut shop if there is not enough liquidity to meet payments for raw material, employee salary and other expenses. We have heard of Governments going bankrupt as there are not enough resources (money) to meet its commitments and is not able to raise money in time.
The Business and Government finance is much more complex and will need a deeper dive. They are not presently our subject of discussion. This column intends to focus on personal finance.
The essence of Money management is all about understanding the individual’s earnings / income, need for day to day expenses, known immediate future expenses say for the next 2/3 years, savings required to meet emergency requirements and also to reach life goals (major expenses) in future. Once we understand the goals, financial planning will help in deciding the time, amount and method of investments in various assets like Banks, Mutual Funds, Gold, stock market or real estate. Such allocation of funds to various investments will also help us in growing our money while also ensuring that the various needs are met without much difficulty.
Going forward, we would discuss each aspects of financial planning including how to identify the critical goals to be achieved and its time lines, analyse the financial need to achieve the goals, evaluate what are the current earnings and savings, identify and reduce wasteful expenses to improve savings, work out an effective investment strategy to suit the financial needs to achieve the goals, and the need for periodical assessment of the financial planning to recognise changes required and fine tune the financial strategy.
