Accounting is important in many aspects of life. In Hindu culture, there is even a god named Chitragupta who is in charge of keeping complete records of all human actions on Earth and punishing or rewarding people based on their Karmas.
Similarly, it's customary to keep track of who gave what at social events and weddings so that you can be sure to reciprocate. Accounting in business improves efficiency and provides the right financial reports/insights to guide business decisions. Applying basic accounting principles to personal finance may assist people in making better decisions. Would your personal finances improve if you treated them like a business? Continue reading for some thoughts…
KEEP TRACK OF ALL YOUR CASH FLOWS
Khata or chopdi is something every Indian is familiar with. How effectively you monitor and manage your cash flows can be considered a fundamental building block of success in finance - be it business or your personal finance. The primary idea is to know where your money is coming from, where it's going and when all this is happening. With this understanding, you can uncover many hidden things and practice control over your money better and plan for the future. Why don't we do it? Only because of a physiological barrier - the fact is that it takes only about ten minutes a week to keep track and update each cash flow.
MAKE AND FOLLOW A BUDGET
Every small shopkeeper in India, no matter how educated he is, likely makes a budget. He understands that by spending less than you earn, you can make more money. On an individual level, you need to create budgets for different parts of your expenses. Having a budget will make it easier to control your cash flow and distribute your money wisely. With a spending plan, you'll always have the right amount of money available for important things. You'll also be able to spend less or put yourself in debt less often. Basically, a budget lets you organize and control your finances so that they work for you instead of against you.
KEEP TRACK OF YOUR KEY PERSONAL FINANCIAL RATIOS
ROI, PE ratio, the dividend yield. Equity investors must know these terms. Wouldn't it be fun to keep track of your own personal finance ratios? We recommend that you track a few key ratios each month, such as Savings ratio (how much you save as % of net income?), Debt to Assets ratio (total debt as % of your assets), Asset Allocation ratio (your investment breakup into equity, debt, physical assets, etc), Debt Servicing ratio (your EMI outflows as % of net income), etc. Tracking these ratios is a great way to keep a tab on your finances and how well you manage them. You can also read and learn more on this interesting idea of personal finance ratios.
EVALUATE THE COMPOSITION OF YOUR PORTFOLIO ON A REGULAR BASIS
We just talked about the asset allocation ratio, which is the ratio of assets like equity and debt a person has in his portfolio. This is just the starting point for understanding the composition of your portfolio. How your investment portfolio is built and managed will have a big impact on your financial success. Investment in asset classes that deliver maximum value (post-tax real returns) are ones that will help the most with your financial growth over time. Anything less means you're losing money even if it doesn't seem like it. Your portfolio should be created to keep up with your goals and objectives no matter what stage in life you're at - short or long-term. Further granular composition of your portfolio can be made to check on things like diversification, sector exposure, market cap exposure and so on.
HAVE A FINANCIAL PLAN AND REVIEW IT PERIODICALLY
Every business or company has goals, objectives, and long-term vision statements. But have you set financial goals for yourself? A financial plan is a document that attempts to chart a course from the present to the future in order to achieve your objectives. Creating a financial plan is like having a "navigation system" on your car to show you the best route from your present to the future. Defining your goals, mapping out your investments, and tracking them on a regular basis will ensure that your destination is closer than you think.
KEEPING BUSINESS RECORDS SEPARATE
Keeping your personal finances separate from your business interests is crucial stuff. Every company keeps separate books for different entities. You can also apply this principle to your finances. To begin with, we can have different bank accounts for different purposes. One can transfer income from one account to other accounts to control spendings. Another suggestion is to avoid bringing personal or family relationships into business because it usually ends up hurting both the business and the relationship. Also, it would be ideal if we did not use any of our personal assets as collateral for business loans and had adequate insurance coverage. In the worst-case scenario, your personal life should be protected from the losses of your business.
SEEK EXPERT GUIDANCE AND HELP
Every good business seeks the advice of experts such as a chartered accountant, company secretary, and legal advisor. Many business owners make the mistake of considering their accountant to be their personal finance and insurance advisor. They can't be expected to know everything about your business; they're not your personal finance advisor and insurance agent! We must recognise that these are distinct domains that necessitate distinct skill sets and expertise. With the importance that money plays in our lives, it's crazy to overlook this crucial aspect of the business. As with other businesses, we would advise you to choose the right financial products distributor/advisor down your career path towards a well-lived and prosperous life.