How to Manage Personal Finance - The Concept of Affordability

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How to Manage Personal Finance - The Concept of
Affordability
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Description

• Ravi and Mahesh are two friends drawing the same
  salary every month. They both want to purchase a
  luxury sedan which costs Rs15 lakhs. Ravi can
  afford it, but Mahesh cant. What could be the
  reason?
• Here, the concept of affordability comes into the
  picture.
• Affordability means a persons ability to pay.
  Since Ravi has affordability, he doesnt find the
  price of the sedan high. On the contrary, Mahesh
  finds the price high because he cant afford it.
• Lets understand how affordability is related to
  personal finance and how you can manage it.

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• Income
• The amount you earn every month contributes to
  your regular source of income. This income could
  be salary, profits from business, returns on
  stock investments, rent from property, etc. It
  would help if you always looked for alternative
  sources of income.
• Higher the income, higher the affordability.
• Savings
• You generate savings when you save a part of the
  amount from his income. These savings can lay
  idle in the cash vault or earn a meagre interest
  in a banks savings account. A better alternative
  would be to put these savings to better use to
  grow it as per your short, medium and long-term
  goals.
• More the savings, more the affordability.

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• Investment
• When you invest savings in a financial
  instrument, you can earn returns on it and save
  taxes. These returns and tax savings are
  additional income. But, you can re-invest this
  surplus to grow your investment further. You can
  invest your money in bank fixed deposits, Public
  Provident Fund (PPF), mutual funds, depository in
  stock market, etc.
• Higher the returns, higher the affordability.
• Expenses
• There are two types of expenses recurring and
  non-recurring. Recurring expenses are
  predictable, and you can plan for them or
  allocate a budget to them. Non-recurring expenses
  are usually unpredictable, like medical
  emergencies, car breakdowns, home repairs,
  unexpected travel, etc. You can set aside an
  emergency stash of money every year. Ideally,
  this stash should be equivalent to three to six
  months of your salary.
• Lower the expenses, higher the affordability.

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• Loans and Debts
• Loans and debts put a financial burden on your
  pocket and family. The EMIs reduce your monthly
  earnings. In case of the unfortunate event of
  your death, your family will have to bear the
  financial obligations. Keep your debt liability
  as low or negligible as possible. When you take a
  loan, it is advisable to calculate it with a loan
  EMI calculator. This will help you determine the
  amount of EMI you can afford.
• Lower the loans and debts, higher the
  affordability.

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Conclusion

• Coming back to our example of two friends, Mahesh
  has a home loan to take care of, and he is also
  reckless about his savings and investments.
  Hence, his affordability is less than Ravi
  despite having the same salary.
• Affordability and personal finance go
  hand-in-hand. It would be best if you kept both
  in check to optimize your financial well-being.
  If you are looking for smart ways to manage
  personal finance, you should avail professional
  money management services. Depending on your
  requirements, you can hire a mutual fund advisor,
  wealth manager or personal finance manager.

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THANK YOU!

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