I know nothing about finance, where do I start? – Part 1

This is a question that comes up often, and one that I find quite difficult to answer. First, I think it’s useful to start by just defining what you mean by finance, and spending some thought on that.

I think it is useful to narrow down finance to personal finance because that’s what people are really interested in when they say they want to learn about finance.

I think of personal finance as the following:

Managing your cash flow to build wealth.

I think this is simple enough to understand and covers the essence of financial planning or personal finance.

The idea is to build wealth so you can meet your life’s financial goals and have enough money during the days of your retirement.

The way you build wealth is by saving money and investing it.

This is not an “either or” thing, you have to do both to really make it work. Spend wisely, and invest intelligently. Doing one but screwing up the other will nullify whatever good work you’ve done in the other area.

I think life and health insurance are also an important parts of this equation, as they help you protect your wealth when you face an emergency.

What is personal finance?

So, in that context I think everything that you talk about in personal finance will be covered under one of the blocks above and you have to understand not only things within each box, but their interplay as well.

For example, frugality is something that a lot of personal finance blogs focus on (unfortunately not this one so much), and they have tips to save money and manage your credit card debt etc. and that’s really important because if you’re paying 2% per month on your credit card, then there’s no point in making a fixed deposit of 9% on which you will pay 30% tax.

On the other hand you need to understand what inflation does to your wealth or the benefits of compounding to building wealth without which you will never fully appreciate why fixed deposits alone will not do the trick for most people if you want to build solid long term assets.

Life insurance and medical insurance are important because they help you deal with life’s uncertainty and ensure that one event doesn’t ruin your life’s savings.

Investing is where it gets really interesting because that’s the area where you have unlimited products to invest in and you can spend a lifetime understanding it but still cover only a small percentage of products. Luckily for us, understanding a few products are enough to get by, and even do well.

I feel that tax is also a part of investing because the goal of investing is generating most after tax returns, and to that extent your tax planning is part of your investment planning.

I haven’t spoken about economy here because while it’s good to know what CRR is or how much external debt a country has, I feel it’s not necessary to know micro or macro economics to manage  your money. If you keep a general tab on what’s going on in the country by reading newspapers then that should be sufficient.

At a high level, if you don’t know anything about personal finance, and don’t know where to start, then I think this is the way to start, defining it and understanding what it means.

You now know what you don’t know and I’m going to build a series of posts to cover each of these topics.

I’d really be grateful if you give me suggestions on what this series should contain as well as the sequence, for example, what should the next post be about?