5 Personal Finance Basics discussed in this article are essential for every individual. If a person fails to manage their finances well, it can become a major problem in their life.
Understand these 5 financial basics that have been shared. No matter what, every individual MUST manage their own finances properly.
5 Personal Finance Basics Every Individual Must Know
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Income
Income is what a person earns from various sources, whether it be salary, contributions, and others.
However, not many are wise enough to manage that money. Some even resort to borrowing just to fulfil their desires.
Remember! No matter how large our income is, if we are not smart in managing it, life will feel tight and suffocating.
The elders used to say, the bigger the pot, the more residue it collects.
This is indeed in line with our income management. The bigger our salary, the more commitments we actually have.
So we need to be wise in managing our finances.
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Savings
We often hear the phrase "when you get your salary, reward yourself first".
That is true, but not your entire salary should be used to reward yourself. This will cause you to fall into "FINANCIAL HELL".
When you receive your salary, take only 10% of your salary amount and save it. Consider the 10% you save as a sign of appreciating your own hard work day and night.
For example, if your salary is RM2,500, set aside RM250 for savings.
As a suggestion, we can split our savings into several methods. For instance, from RM250 we split it into two:
(a) Wahed Invest
(b) Hello Gold
Why these two?
There are many other ways, but this is just an example because you can start saving with a small amount of capital.
With Wahed Invest, you can save via auto debit every month for as little as RM100.
From the earlier example of saving RM250, RM100 goes to Wahed Invest and the remaining RM150 can be saved in the form of gold.
Gold is inflation-proof. Hello Gold allows you to start with as low as RM1 and can be done right from your phone. Even easier.
Cash is king. We always hear this phrase, right? Yes, it is true.
Look back at the Covid-19 pandemic when the economy was in crisis. Those who had cash were able to survive.
That is why it is very important for you to start saving now. We do not know what other crisis may hit after this. As the saying goes, prepare your umbrella before it rains.
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Expenses
After saving 10%, you still have 90%, right?
BEWARE! Not all 90% is for spending. Only 50-65% should go to expenses. So we take a maximum of 65% for spending.
From this 65%, it is used to pay bills, monthly car payments, providing for your wife if you are married, and do not forget to give 2%-5% of the 65% to your parents as well. They are the blessing of your life.
InshaAllah, by giving them money, Allah will grant us even more sustenance.
The simplest way is to divide this 65% into several envelopes.
First envelope 30% - for car and house payments. For the car, 10%-15% is sufficient. It is true that a car is an asset, but it is a depreciating asset.
Beyond that, use the money to save up a deposit to buy a house if you do not have one yet, or use it for the monthly payment of your future asset.
Second envelope 20% - This amount is for paying all bills such as electricity, water, WiFi, and also money for groceries and food.
Third envelope 10% - Providing for your wife if you are married. If you are single, this 10% can be split for entertainment and a small self-reward such as going on holiday for those who love travelling, or buying new gadgets for those who enjoy tech.
Fourth envelope 5% - Give to our parents. They do not ask, but we sincerely give to them. Appreciating the sacrifices they have made for us since we were young until we are now able to work.
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Protection
Only 20%-30% of Malaysians are aware of the importance of financial protection.
Realise that protection is very important. You only need to allocate 10% of your income for personal protection.
For example, with a salary of RM2,500, 10% is only RM250. In fact, with RM250 you can already get 2 benefits: a medical card and Hibah (bequest).
A medical card is for when something happens to you such as illness and others. With a medical card, it can cover your treatment at the hospital.
Hibah is a gift to your loved ones in the event of your passing.
Perhaps at that time, your house is not yet fully paid off, or your wife is not working. By taking out a hibah with a cash value of RM100K-300K.
That amount can somewhat ease the burden on your wife for those who are married. For those who are single, this may be the last gift to your parents.
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Investment
I know many are beginning to discover investing, especially in stocks.
But many get it wrong. They use their savings, salary money and other funds to invest. That is wrong!
Investing should be done with surplus money. Money that even if you lose 100% of it, you will not be bothered.
It should not affect your daily life, because investment involves risk.
So for those who are just starting out in investing, allocate 15% of your income as the amount you are willing to lose.
That is your investment money. For example, with a salary of RM2,500, 15% is RM375. Sounds little? That is just one month.
If you save for 5 months, that is already RM1,875. That amount is actually enough to start investing. With that amount, you can grow it further. Start by opening a CDS Account first.
Conclusion
Planning your finances well is an essential foundation for every individual. By understanding these 5 personal finance basics — setting goals, controlling expenses, building an emergency fund, managing debt and starting to invest — you will be better prepared to face financial challenges.
Frequently Asked Questions (FAQ)
1. What are the 5 personal finance basics every individual should know?
The five essential personal finance basics are setting financial goals, controlling expenses, building an emergency fund, managing debt wisely, and starting to invest for the future.
2. What percentage of salary should be saved each month?
It is recommended to save at least 10% of your monthly salary. This savings can be split into 2-3 different places as a diversification strategy.
3. When is the right time to start investing?
You can start investing once you have a sufficient emergency fund and your debts are under control. With capital as low as a few hundred ringgit, you can already begin investing in stocks.
4. Why is an emergency fund necessary before investing?
An emergency fund is important as a financial safety net. Without an emergency fund, you may be forced to sell your investments at an unfavourable time during an emergency, which could result in losses.
Ready to start investing and growing your wealth? Open a CDS account with Mahersaham today. Also download our free Stock Basics Ebook for a complete guide to learning stocks from the basics.
Further Reading
