The 4 Pillars of Personal Finance: A Simple Guide to Mastering Your Money

Think about this scenario: You wake up one morning, feeling confident and in control of your financial future. You know exactly where your money comes from, how you spend it, how much you save, and where you invest it. This isn’t just a dream: it’s a reality you can create by mastering the four pillars of financial well-being. Personal Finance.

Whether you’re just starting out or looking to improve your money management skills, knowing how to earn, spend, save and invest effectively can change your financial life.

We understand that taking the first steps to managing your money can be overwhelming. However, as you delve deeper into personal finances, you’ll find that breaking them down into four key pillars—earning, spending, saving, and investing—can simplify the process and put you on the path to financial independence.

What are personal finances?

Personal finance is the knowledge that enables you to make the right financial decisions considering all aspects of your finances, such as earnings, savingsexpenses, short- and long-term wealth goals, risk appetite, and overall life plans.”

It has 4 pillars:

1. Win

This pillar is about understanding how you make money. Many people rely on a single source of income, such as a salary or business income. The COVID-19 pandemic was one such situation that highlighted the risks of this approach, as many people lost their jobs or faced pay cuts and struggled to manage their finances. Having multiple sources of income can improve your overall financial well-being.
There could be several sources of income:

• Primary: Salary or business income.

• Interest income: from savings accounts or fixed deposits.

• Investment Income: Dividends, rental income, or gains from the sale of investments.

• Other: Fees, royalties or secondary income.

You can explore freelance opportunities or start a small business alongside your full-time job. Having multiple sources of income will give you financial security and open up new opportunities for growth and learning.

2. Spend

How you spend your money is very important. Distinguish between needs and wants using the 50:30:20 budgeting rule:

• 50% for necessities: essential expenses such as rent, food, utilities and transportation.

• 30% for necessities: non-essential expenses such as eating out, entertainment and vacations.

Smart, conscious spending includes tracking your expenses, avoiding impulse purchases, and prioritizing what truly adds value to your life. Benjamin Franklin The wise man said, “Beware of small expenses; a small leak may sink a great ship.” Therefore, being aware of your spending habits ensures that your money is used effectively.

3. Save

Saving is the foundation of a financial future. Many people save whatever they have left after spending, which is not the right way to manage money. Instead, save a certain percentage of your income first before allocating money for your expenses. You can try to save at least 20% of your income, as per the 50:30:20 budgeting rule, and you can gradually increase your savings percentage as your income increases.

For example, if you earn Rs 50,000 a month, you can set aside Rs 10,000 for savings and investments at the beginning of the month. This disciplined approach ensures that money is consistently set aside for future financial goals.

4. Invest

Saving alone is not enough due to inflation. Therefore, investing savings and making your money work for you is crucial in the long run. You can allocate your savings to different assets like stocks, debt, and gold to achieve your financial goals. It is important to keep in mind your financial goals and risk tolerance while choosing investment options. For example,

• Stocks are suitable for long-term goals that provide returns that outpace inflation.

• Debt is suitable for short-term objectives and adds stability to the portfolio.

• Gold acts as a hedge against inflation and is considered a safe haven in times of uncertainty.

Remember the popular saying “Don’t put all your eggs in one basket,” which highlights the importance of diversifying your investments. Diversification helps you optimize risk and return, ensuring your money grows over time.

Finally, money management is a path that can lead you to greater control and confidence in your financial future. By focusing on the four pillars (earning, spending, saving, and investing), you will build a solid foundation that will simplify money management and put you on the path to financial empowerment.

Remember, it’s not just about learning, it’s about taking action. Get started today and watch how this paves the way to a more secure and fulfilling financial path.

(Disclaimer:The recommendations, suggestions, views and opinions of the experts are their own and do not represent the opinions of the Economic times)