Basics of Personal Finance (ABC)

Money should be seen as a tool — a way to compensate others for their labor. It saves us time and effort that we would otherwise spend doing those activities ourselves. 💰 The Evolution of Money — From Barter to Belief talks about how money and currency evolved throughout history.

When we say someone “has money,” it can mean different things. For some, it means readily available cash, for some, it would be a stable net worth.

Importance of Liquid Cash

Liquid cash refers to the money you have readily available, such as the balance in your bank account. This money allows you to immediately fund purchases or expenses without delay.

Before making any expenditure, it’s important to understand how you will finance the transaction — in other words, where the money will come from to pay for it.

There are different ways to finance purchases:

Using your own money directly
Paying through EMIs and repaying over time
Renting or leasing instead of buying

Even for the same product, the total amount you pay and the timing of your payments can make a big difference in your finances.

Understanding Your Net Worth

A great starting exercise to better manage your money is to create your own net worth statement.

To do this:

List all the items you currently own — this includes your bank balances, provident fund, property, gadgets, vehicles, and anything else of value.
Assign a current market value or resale value to each of these items. This gives you an idea of your total assets.

Next, list everything you owe to others — such as loans, credit card dues, or other liabilities.

The difference between your assets and liabilities is your net worth — a key indicator of your financial health.

A Sample Networth table could look like this

Category	Particulars	Amount in Rs.
Asset	Balance in HDFC Bank including FD	Rs. 3,50,000
Asset	Current value of Investment in Shares	Rs. 11,50,000
Asset	Value of House Property	Rs.35,00,000
Liability	Mortgage Loan	Rs. 15,00,000
Liability	Personal Loans	Rs. 2,00,000
Net Assets		Rs. 33,00,000

The Three Broad Questions of Personal Finance

We can break down personal finance into three fundamental questions:

How much we want to survive comfortably right now? Answered by Budgeting
What are the identified expenses in the future? Answered by Saving & Goal-based Investing
How much we want to accumulate for retirement? Answered by Saving & Long-term Investing

Calculating Your Comfortable Annual Living Expenses

To begin, figure out how much money you need per year for a comfortable life. Break it down into two parts:

How much do you need just to survive
How much do you need to be comfortable

For example, when I was 23, I estimated I needed around INR 300,000 per year to live comfortably. My monthly expenses were roughly:

Rent: INR 10,000 (Shared Rental)
Food and groceries: INR 8,000
Essentials: INR 6,000
Other miscellaneous expenses: INR 8,000

This number should be personalised based on your needs. Each one would have their own need; some people would want to support their parents over and above the amount, and would need a higher monthly requirement.

I also calculated my bare minimum survival amount at around INR 150,000 per year — a surprisingly low figure, but achievable with careful budgeting. Survival amount would mean you are no more living in a metro city, reducing outings and eating from restaurants, etc.

Understanding Your Current Savings Potential

Once you know your annual needs, you can determine how much you’re able to save. For instance, a person earning INR 15 lakhs per year should ideally be able to save at least INR 11 lakhs after paying approximately INR 1 lakh in taxes. This means the excess cash flow you generate annually is around INR 11 lakhs.

This amount shows how much our potential is. Our future corpus is limited by how much we can potentially save and the return from that saving. Knowing this helps us to validate whether our future needs are within our current capabilities or whether we should try something new.

Planning for Future Expenses (Goal-Based Investing)

Next, identify your major upcoming expenses and the timelines for each: Everyone will have their own personal reasons to spend. Some might want to travel the world or start a company or even donate to a specific cause. Some common expenses we face would fall in the following categories.

Sister’s marriage: INR 5,00,000 in 3 years
Your own marriage: INR 10,00,000 in 5 years
Buying a car: INR 8,00,000 in 8 years
Buying a house: INR 50,00,000 in 10 years

The timeline for these expenses is crucial. The next step is to set aside money for each of these goals through goal-based investing.

Planning for Retirement Corpus

The third part of the equation is to estimate how much you’ll need at retirement to live comfortably. For example, I set a retirement corpus target of INR 2 crores over a 30-year horizon. With this information, you can calculate how much you need to earn, save, and invest during your working years.

Unexpected Events

Beyond the usual planned items, we must acknowledge a fourth hidden factor — unexpected events. These are rare, unpredictable, and can completely derail even the most meticulous financial plans. Examples include major illnesses, surgeries, or the loss of a family member.

While we cannot foresee or prevent such events, we can mitigate their financial impact through appropriate protection mechanisms such as Health insurance, life insurance, and emergency funds.

Planning for the left tail — those low-probability but high-impact events — is not pessimism; it’s prudence. It converts uncertainty into manageable risk and safeguards long-term stability.

The Discipline of Financial Planning

Once you have a clear picture of your income, expenses, future goals, and retirement corpus, it becomes a matter of discipline and priority.

If you want to take an international trip or indulge in adventure sports, include those as identified expenses as well. The goal isn’t to limit your spending but to be aware of your earning potential and allocate money wisely.

A Simple Projection Example

Someone earning INR 1 lakh per month after taxes, over 30 years (without accounting for inflation), would earn roughly INR 3.6 crores. Understanding how to manage this money over a long period will help you structure your day-to-day financial decisions effectively.