Managing Personal Finance: How to go about it?

People generally resort to experts when it comes to managing personal finance. Is it correct to be dependent on external agency for this activity?

Yes it is correct, but it has its own limitations. The success is dependent on the skill of the allocated personal finance manager.

More often than not, people blindly trust their finance manager, and this is a mistake. Why? Because not all personal finance managers are as skilful. So what is the way out?

Soft start…

First a person should start managing personal finance by oneself. Easier said than done, right?

Had personal finance management been so easy, what was the need of financial advisors around? This questioning is justified. Why?

People who are not trained to manage money, need not risk managing personal finance by self. This point is well taken.

But consider this, if someone will introduce you to the basics of managing personal finance, then can you start? I will say yes. Why? Because managing ones personal finance is also a lot of fun.

Moreover, who cares the most for ‘our’ money? We ourselves. So why not give it a chance and try to learn the basics of personal finance management, and see if it strikes a chord.

So the sorts of soft start will be to learn the basics of personal finance management, and then take the next step.

I would say, reading one blog post might be enough to gauge and grasp the basics of this management skill.

So let’s begin with seeing the personal finance management from a birds eye view.

The Process Flow – Managing Personal Finance

Managing Personal Finance - Flow Chart

What is this process flow? It describes the important steps of personal finance management. What are the steps?

  1. Balance Sheet Preparation.
  2. Investment portfolio preparation.
  3. Insurance portfolio preparation.
  4. Cash flow statement preparation.
    1. Expense Budget preparation.

Using these steps, we have the goal of achieving the ultimate objective.

What is the ultimate objective?

In personal finance the ultimate objective should be Net worth building.

Managing Personal Finance - STEPS

Why net worth needs to be built? Because it is our net worth which ultimately can finance our goals. The process of managing ones personal finance deals with this:

A “plan on how to feed ones balance sheet”.

What is balance sheet? It’s a record of ones list of assets and liabilities accumulated over time.

Target is to buy more assets and less liabilities.

#1. Balance Sheet…

Here I would like to make a distinct point. Net worth building is essential, but it is also important to have a clear visualisation of ‘net worth’. What I mean?

Buying investments is one thing, but keeping a record of it, to give it more visibility is also essential. How to keep the record? By maintaining a balance sheet.

This type of record keeping can have dramatic impact on ones size of wealth accumulated over time. Why?

Because it give one the necessary visibility of assets and liabilities.

Remember, target is to accumulate more assets and less of liabilities.

We will see how easily we can build our personal balance sheet. But before that let’s memorise the formula of net worth.

Net worth = Total Asset – Total Liabilities

Feeding the balance sheet

Managing Personal Finance - Balance Sheet
Balance Sheet

Balance sheet preparation is an essential part of personal finance planning. It is in the balance sheet that we see how much ‘pluses’ and ‘minuses’ we have scored while investing.

What are pluses? Assets. What are minuses? Liabilities.

It is the record of these assets and liabilities that needs to be continuously fed into the balance sheet.

  1. Market value of our purchased assets, and
  2. Market value of our committed liabilities.


In the balance sheet itself I prefer to add the column of Goal. It is not a standard practice, but I prefer it this way. Why?

Because it helps me to focus on individual goals, and and also see how each of them are being served (by assets and liabilities).

Just by looking at such a balance sheet, it can also help to time the purchase of assets and liability. How? Let’s see an example.


Suppose, today my child is 17 years of age, and I am asked to pay Rs.35 Lakhs as college fees.

If you will see the above balance sheet, it has only Rs.2.0 Lakhs worth of assets under the head “child’s future”. There is shortfall of Rs.33 lakhs.

Managing Personal Finance - Balance Sheet - Example

How to make-up for this shortfall. By taking an education loan (Liability) of Rs.33 Lakhs. The balance sheet exactly shows how much education loan needs to be taken.

Had this balance sheet not been in place, I might have dug into assets of other goals to finance this need.

In terms of personal finance management, this would have been a terrible mistake.

Thankfully there is no immediate need of education loan now. I have 10 more years in hand. In these 10 years. I will have to feed the goal of “child’s future” with assets worth Rs.35 Lakhs.

#2. Investment Portfolio

The asset column of the balance sheet needs to be fed with data which appears in our ‘investment portfolio’. Means, to feed the balance sheet we need to prepare our investment portfolio.

Managing Personal Finance - Balance Sheet - Asset Column

What is investment portfolio? It maintains our list of ongoing investments. It also works like an investment plan. How?

Majority of us invest our money systematically, right. My investment plan suggests me “how much to invest’ each month, for each goals.

My investment portfolio looks like this:

Managing Personal Finance - Investment Portfolio
Investment Portfolio

What my investment portfolio talks about?

It compares goals, with ongoing investments, and size of corpus built as on date.

  • Goals.
  • Investment plan.
  • Size of corpus.

Seeing the above three things in one glance gives a lot of clarity on what’s being already done, and what needs to be done next.

If I am going slow, I will pump in the gas by increasing my monthly contributions. If I am close to my goal, I will think about redemption.

But for me the main utility of investment portfolio is to keep the data handy, for feeding in the numbers in balance sheet. Remember, our ultimate goal is net worth building, and it becomes visible only in the balance sheet.

Example of Investment Planning…

Suppose you have an investment goal of building a retirement corpus of Rs.3.0 Crore in 25 years. How to build an investment plan for this goal?

The objective of investment planning should be to know the following:

  • How much to invest each month?
  • Where to invest money?

How to do it? We can use a simple SIP Calculator as provided below:

Data Input
Monthly Contribution (Rs.)
Expected Return p.a. (%)
Time (in years)
SIP – Appreciated Amount (Rs.)
SIP – Total Investment (Rs.)
SIP – Effective Annualized Return (%)

After few permutations and combinations it will be clear that, to build a corpus of Rs.3 Crore in 25 years, monthly investment of Rs.9,000 will be necessary.

The investment must yield an average return of 15% p.a.

So where to invest money? To yield a net average return of 15% p.a., investing money in proportions shown below will be ideal:

  • 75% – in Equity (ROI: 17.5%).
  • 25% – in Debt (ROI: 7.5%).
Return p.a.17.5%7.5%15.0%
Investment / Mon (Rs.)6,7502,2509,000

So what is the plan for retirement corpus building? Investing Rs.6,750 per in equity based mutual fund, and Rs.2,250 per month in debt based mutual fund (say).

Read more about the following here:

#3. Insurance Portfolio

Like investment is essential, insurance is also as important. But you will notice that “insurance” has a rather small weight in the overall net worth building (see balance sheet above).

So why to spend time and money on it? Because insurance deals with emergency management.

It the emergencies which can eat into our investment portfolio the most, if we will not plan for it.

Why I say so? Suppose there is a major accident in a family, and you had no medical insurance. How the hospital bills will be paid? Probably by liquidating the investments.

But such digging into the investment portfolio can be prevented by buying sufficient insurance cover.

This may look like an unnecessary cost in normal times, but they prove to be the best saviours in need.

A typical insurance portfolio should look like this:

Managing Personal Finance - Insurance Portfolio

Read more about the following here:

#4. Cash Flow…

It will not be wrong to say that no financial planing can be executed without first preparing the cash flow report.

What is a cash flow report? List of all income and expense heads.

What is the utility of cash flow report? It helps us to compute and visualise, how much maximum we can save each month/year.

It clearly highlights our savings.

A typical cash flow report can looks like this:

Managing Personal Finance - Cash Flow
Cash Flow Report

Why it is important to know about savings? Because it is only from the savings that ones net worth can be built.

The higher are the savings, faster and bigger will the net worth grow.

One of the biggest component of cash flow report is “household expenses“. This is the real killer. Why I say so?

Because it is here that we tend to overspend the money. What is the solution? Prepare an expense budget and spend according to it.

Expense budget…

The root of all financial planning has its base in the expense budget. How? Because it is the expense budget that has potential to prevent us from overspending.

People who overspend, can never afford to enjoy the luxury of “high net worth”. To enjoy it, one must cut their spendings today. Why?

Because less spending will lead to more savings, which eventually means more investment.

Read more about the following here:

Final words…

We cannot afford to lead a safe and secure life without managing personal finance.

But it is also essential to know what to plan, and how to plan.

In the process of financial planning, the end goal is building ones net worth to the required level.

How to know the present net worth? By building the personal balance sheet.

How to know the ‘required level’ of net worth? This can be done by estimating ones financial goals.

Ones the financial goals are known, the next step is to prepare an investment plan. It is here that we will know how much shall be invested each month to reach the goal.

But to make the investment plan a success, it is essential to save sufficiently each month. How to estimate ones savings? By preparing ones cash flow report.

All this said and done, if we will not do this, no financial plan will ever succeed. What is it? Prevent overspending. How keep a check on overspending? By spending as per ones expense budget.

So in conclusion, here are the important take away’s from this article:

  • Build your expense budget and spend accordingly.
  • Have a cash flow report to visualise savings.
  • Use investment plan to invest savings.
  • Always invest with the financial goals in mind.
  • Keep feeding your balance sheet.
  • The ultimate objective is to build a sufficiently big net worth.
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  1. 1) Can you share the income expenses budgeting software with formulas.

    2) I have a querry, if you can help me solve it, it would be appreciated:

    Sir suppose i want to accumulate 25 lakhs in 96 months at 12% then as per tvm concept i will have to invest rs.15632 pm to achieve the goal.

    Now i find the amount to be high but i can start with a lower amount today and increase the investment amount by x % every year so that it matches to 25 lakhs target.If you could explain it in excel it would be good, with formulas. It is step up investment but am not able to do in excel.

    Vivek Sethi

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