In this Chapter
- What is Personal Finance
- Areas of Personal Finance
- Principles of Personal Finance
- Insurance
- Types of Insurance
- Insurance Regulatory and Development Authority (IRDA)
Personal Finance
Personal finance is the art of planning and managing one’s financial activities. Management activities are not only limited to corporates. Rather, they have entered into the daily routines of individuals. Earning money is one task, but the most important task is saving. Individuals who understand the importance of saving and investing and undergo proper financial planning to plan their finances can fulfil their financial goals and ensure future financial security.
Future financial security is something that every individual wants, but it needs more knowledge and discipline. This is because to attain future financial security, an individual must first understand his finances, expenditure, saving patterns, needs and wants, and the last but most important discipline. With discipline, an individual can understand the fine line between needs and wants and save himself from unnecessary and luxurious expenses.
Areas of Personal Finance
Personal finance includes managing the following –
- Income – Income is the first source of cash inflow that an individual receives in the form of salary, commission, wages, pension, dividends, rent, etc. It is the first step of accounting and allocating cash inflow received.
- Spending – Spending includes all the daily or monthly expenses that are unavoidable. For example- groceries, rent payments, loan installment payments, taxes, travel, food, entertainment, and credit card payments. Expenses should be made wisely as they reduce the cash-in-hand balance for saving and investing. If expenses overlap earnings, then it is called a deficit. An individual must prioritize his expenses for financial security.
- Saving – The money left after expenses is savings. Savings is the surplus amount that an individual retains for future investment purposes. Savings motivates an individual to earn more for future safety. However, the savings must be directed towards proper investment so that it can generate a good return which in turn will serve as an additional source of money besides income. Savings include Bank accounts and cash in hand.
- Investing – For the sake of future financial safety, individuals invest their savings in the purchase of assets and securities with the intention of receiving back more money than originally invested. It includes investing in stocks, mutual funds, bonds, real estate, commodities, fixed deposits, government schemes, etc. Before investment, an individual must assess his risk and return capability ratio.
- Protection – It is required for any unpredictable events. It includes life insurance, health insurance, motor insurance, estate planning, etc.
Principles of Personal Finance
- Prioritization – Make a priority list. Classifying expenses into avoidable and unavoidable.
- Assessment – Assessing the pros and cons of each and every investment. Closely identify the risk and returns involved therein.
- Restraint – To keep a check on oneself for not spending money on unnecessary needs. Taking disciplinary actions.
- Knowledge – Gaining more knowledge and information about financial management, its process, financial markets, products, etc., to become a wise investor.
Insurance
Nothing comes free of cost in life. An individual has to accept many risks in life to move forward. When accepting the risks, an individual also considers the protection and safety of his family and belongings.
This safety is insured by insurance. Insurance is a device to reduce the risk of loss of life and property. Insurance can also be called a social device or a scheme of economic cooperation by which the risks and losses of a few people are spread among a large number of people, as people prefer small fixed liabilities instead of big and uncertain liabilities. Insurance cannot prevent the occurrence of a risk. Rather, it provides for the losses that occurred due to risk. It is a scheme that covers large risks by paying a small amount of capital called a premium. Insurance these days is also a means of savings and investment.
Parties to Insurance
- Insurer
- Insured
- Agents /Broker
- Surveyors and Loss Assessors
- Third-party administrators
Insurance is basically a legal contract between two parties where one party, called the “insurer”, undertakes to pay a fixed amount of money on the happening of a particular event, which may be certain or uncertain. The other party, called the “insured”, pays in exchange for a fixed sum known as the “premium”. The document that embodies the contract is called “policy”.
There are three types of insurance businesses, namely;
- Life Insurance – Insuring events like accidents, untimely death, etc.
- General Insurance – Also called non-life insurance, is for a period of one year. Fire insurance, motor insurance and marine insurance are some of their examples.
- Reinsurance – When the primary insurer transfers a part of or all of the risks he has ensured to another insurer to reduce his own liability is reinsurance. The risk is shifted to another insurer called the reinsurer.
Insurance Regulatory and Development Authority (IRDA)
The IRDA is the regulatory authority to regulate and develop the business of insurance and reinsurance in India.
Objectives
- To promote transparency and fairness in all financial dealings
- To protect the interest of and secure fair treatment to policyholders.
- To ensure speedy settlement of genuine claims and to prevent fraud and other malpractices.
- To ensure that insurance customers receive clear, precise, and correct information about products and services
- To make the customer aware of their duties and responsibilities regarding policy.
- Specifying code of conduct for surveyors and loss assessors.
- Healthy growth of the insurance market.
Investor’s Tip
