Online Resources

Congratulations! You now have access to practical templates of the

Personal Finance concepts that you will learn in this book. These
downloadable templates will help you implement your learnings
in the real world and give you an in-depth understanding of the
concepts. The templates include:

1. Income and Expense Statement

2. Balance Sheet

3. Budget Planner

To access the templates, follow the steps below:

1. Go to www.vibrantpublishers.com

2. Click on the ‘Online Resources’ option on the Home Page

3. Login by entering your account details (or create an

account if you don’t have one)

4. Go to the Self-Learning Management series section on the

Online Resources page

5. Click the ‘Personal Finance Essentials You Always

Wanted To Know’ link and access the templates.

Happy self-learning!
This page is intentionally left blank
 TM

SELF-LEARNING MANAGEMENT SERIES

PERSONAL
FINANCE
ESSENTIALS
YOU ALWAYS WANTED TO KNOW

An introduction to managing your personal finances better

ANKUR MITHAL
Personal Finance Essentials
You Always Wanted To Know
First Edition

© 2023, By Vibrant Publishers, USA. All rights reserved. No part of this publication
may be reproduced or distributed in any form or by any means, or stored in a database
or retrieval system, without the prior permission of the publisher.

Paperback ISBN 10: 1-63651-184-8

Paperback ISBN 13: 978-1-63651-184-9

Ebook ISBN 10: 1-63651-185-6

Ebook ISBN 13: 978-1-63651-185-6

Hardback ISBN 10: 1-63651-186-4

Hardback ISBN 13: 978-1-63651-186-3

Library of Congress Control Number: 2023942250

This publication is designed to provide accurate and authoritative information

in regard to the subject matter covered. The Author has made every effort in the
preparation of this book to ensure the accuracy of the information. However,
information in this book is sold without warranty either expressed or implied. The
Author or the Publisher will not be liable for any damages caused or alleged to be
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 SELF-LEARNING MANAGEMENT SERIES

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9781636511030
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FINANCIAL ACCOUNTING ESSENTIALS 9781636510972

FINANCIAL MANAGEMENT ESSENTIALS 9781636511009

MACROECONOMICS ESSENTIALS 9781636511818

MICROECONOMICS ESSENTIALS 9781636511153

PERSONAL FINANCE ESSENTIALS 9781636511849

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BUSINESS LAW ESSENTIALS 9781636511702

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 About the Author
Ankur Mithal is a widely experienced author
and business professional. His 15 years of
experience with Standard Chartered Bank
lent him extensive financial knowledge which
he has poured into this book. He delivered
roles in sales where he guided clients in
their purchase of financial products/services,
investing, and borrowing; as well as project management and
operations where he led multiple cross-border multicultural
teams. He was also involved in setting up the bank’s first Priority
Banking Center in India.

In addition to banking and finance, he has worked closely with

the BPO and E-learning industries. His other published works
include:

1. Some Method Some Madness, Managing BPO in India – a

guide to the BPO industry

2. What Happens in Office, Stays in Office – a collection of

satirical stories about office life

3. Organizational Development Essentials You Always Wanted

To Know – A book for young professionals on the subject of
Organizational Development

Ankur operates as a business consultant and freelance writer,

apart from working on his own writing projects.
 Other Contributors
We would like to thank our editor, Kalpesh Ashar for his
contribution to making this book the best version possible.
Kalpesh is a management consultant and corporate trainer
holding an MBA (Dean’s Award Winner) from SPJIMR, one of
Asia’s top business schools, and an engineering degree with
honors in electronics. He has over 24 years of experience in large
organizations and start-ups in Asia, USA, and Europe. Kalpesh
has worked in several project management roles, including senior
project manager, delivery manager, and program manager. He
is passionate about writing on management subjects. His techno-
business background gives him a unique position to write on
management topics that are easy to understand for non-MBA
graduates. His books are authored in simple language without
unnecessary use of management jargon.
 What experts say about this book!
Personal Finance Essentials You Always Wanted To Know is an introductory
source for those wanting to learn basic personal finance concepts. I often
find that personal finance books either over-complicate or over-promise
the benefits to the reader. However, this work does an effective job
of bridging the gap between practice and theory by only emphasizing
the essential components of both. By exposing the reader to a broad
range of important concepts, this book is an appropriate starting point
for those needing a framework to understand the importance and
application of personal finance concepts within their own life.

– James Meersman, Assistant Professor,

Juniata College

Ankur Mithal's Personal Finance Essentials You Always Wanted to Know

provides a thorough overview of personal finance topics for the novice
and others who want to backfill holes in their knowledge.

I'm pretty savvy on many of the topics discussed in this book, but still,
Mithal managed to surprise me with facts I didn't know. The book
is written in layperson language, making it easy to understand and
consume. I didn’t have to look up words or memorize ideas to figure out
what Mithal was saying. He kept it so simple that each topic organically
grew from prior ones. Each chapter includes a chapter summary and a
quick quiz to review essential topics and remind readers of the important
elements. I’m not a fan of quizzes but in this case, it serves the serious
student well to confirm their knowledge base for the upcoming chapters.

Overall, this is recommended to those with an interest in money and

personal finance who might consider these topics too complicated.

– Jacqui M, Author and Adjunct Professor,

California State University and University of California San Diego
 What experts say about this book!
Personal Finance Essentials You Always Wanted To Know is a
comprehensive guide that provides readers with a solid foundation in
the realm of personal finance. The book's structure is well thought out,
making it accessible to individuals at various stages of their financial
journey, from beginners to seasoned practitioners.

What sets this book apart is its ability to break down the often
intimidating world of taxes, helping readers understand the distinctions
between different tax types and their respective responsibilities. One of
the book's highlights is its treatment of retirement planning, a subject
that holds immense significance for many readers. Each chapter's
conclusion is marked by a well-crafted summary that elegantly ties
together the key points discussed, serving as a valuable reference for
readers. Additionally, the inclusion of quizzes at the end of each chapter
enhances the learning experience, ensuring that readers absorb and
retain the material effectively.

In sum, this book is a must-read for anyone seeking to navigate

the complex world of personal finance. Written by an experienced
professional, it caters to a broad audience, making it equally beneficial
for those taking their first steps in financial planning and those looking to
refine their existing knowledge and skills.

– Arkadiusz Mironko, Associate Professor of Management and

Entrepreneurship, Indiana University East
 Table of Contents

1 Introduction to Personal Finance 1

1.1 Introduction to Finance 2
1.2 What is Money? 2
1.3 History of Money 3
1.4 The Value of Money 5
1.5 Currency/Foreign Currency 6
1.6 Personal Finance, Corporate Finance, and
Public Finance 8
1.7 Factors That Affect Personal Financial Concerns 9
Quiz 12
Chapter Summary 15

2 Important Financial Concepts 17

2.1 Income and Expense 18
2.2 Income and Expense Statement 19
2.3 Cash Flow Statement 21
2.4 Asset and Liability 25
2.5 Net Worth 27
2.6 Time Value of Money 31
2.7 Compounding 34
Quiz 39
Chapter Summary 42

3 Budgeting 43
3.1 The Importance of Planning 44
3.2 Introduction to a Budget 45
3.3 Principles of Good Budgeting 46
3.4 Common Budgeting Methods 48
3.5 Creating a Budget 51
3.6 Contingency Planning 55
Quiz 58
Chapter Summary 61
4 Banking 63
4.1 Introduction to Banking 64
4.2 Types of Banks 65
4.3 Types of Accounts 69
4.4 Lending Facilities 73
4.5 Other Banking Services 76
Quiz 79
Chapter Summary 83

5 Borrowing 85
5.1 Introduction to Borrowing 86
5.2 Credit Risk 88
5.3 Consumer Reporting Agencies 89
5.4 Credit Score 91
5.5 Why Should You Check Your Credit Report? 92
5.6 Types of Borrowing 94
5.7 Protection and Safeguards for Borrowers 97
Quiz 99
Chapter Summary 103

6 Home Ownership 105

6.1 The Importance of a Home 106
6.2 Buy or Rent 106
6.3 Mortgage Loans 108
6.4 Types of Mortgage Loans 110
6.5 The Mortgage Loan Process 114
6.6 Mortgage Calculator 119
6.7 Factors Affecting Interest Rate 120
Quiz 122
Chapter Summary 126

7 Investing 127
7.1 Introduction to Investing 128
7.2 Investing Fundamentals 129
7.3 Common Financial Investment Avenues 136
 Quiz 142
Chapter Summary 145

8 Insurance 147
8.1 Introduction to Insurance 148
8.2 Principles Underlying Insurance Contracts 149
8.3 Types of Insurance 150
8.4 Pricing of Insurance 164
Quiz 168
Chapter Summary 172

9 Taxation 173
9.1 The Case for Taxation 174
9.2 Income Tax 175
9.3 Other Major Taxes 178
Quiz 181
Chapter Summary 184

10 Retirement Planning 185

10.1 Historical Perspective On Retirement 186
10.2 Retirement and Life Expectancy 187
10.3 The Sources of Retirement Security 191
10.4 Estate Planning and Creating a Will 193
10.5 Planning for Retirement 195
Quiz 197
Chapter Summary 200
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 Preface
Though it may have come into being as a means to an end, of
facilitating the exchange of goods and services between human
beings, money has grown in importance and today requires
management for its own sake.

The accumulation, preservation, and growth of money is a need

for every individual. The various streams of knowledge that come
together to enable individuals and households to manage money
is known as personal finance.

Personal finance is an all-encompassing term that covers how a

person or household marshals the resources that can be expressed
in the form of money that is available to them. It encompasses
income and expenditure, budgeting, insurance, banking,
investing, savings, tax planning, retirement, and many other
aspects connected with money and finance.

With the options and opportunities for earning and spending,

buying and selling, investing, and saving having multiplied, it
has become more important than ever before for individuals to be
financially knowledgeable so that they can make decisions related
to personal finance in a manner that delivers long-term benefits.

This book seeks to educate common people on the basics of

personal finance and make them aware of the possibilities.

It is for everyone interested in knowing a little more about

personal finance.
This page is intentionally left blank
 Introduction to the book
It is difficult to imagine a world without money. Money is
commonly used as a medium of exchange. When we buy a car, we
pay for it in money. When we eat at a restaurant, we pay for it in
money. We can pay in the form of paper currency, or through one
of the many digital modes in which it is held. Money is also used
as a store of value. I can choose to retain the money I have and use
it for buying goods and services at a later date.

As human beings, we understand the relevance of money in

every sphere. The management of money is covered by the
subject of personal finance which is what this book deals with. It
is one subject that touches the life of every individual. Hence, it
is important that every individual has a basic knowledge of the
subject so that he/she can manage personal finances in a manner
most suitable to his/her situation and goals in life.

Personal finance covers a wide range of areas, apart from the

obvious ones like saving and investing money. An understanding
of personal finance should cover:

● Personal finance basics – such as income and expense, asset

and liability, and financial statements

● Budgeting and making a financial plan for the future

● Banking – types of accounts and facilities

● Investment choices and fundamentals of investing

● Borrowing – types of credit, credit risk, credit score

● Home – buy or rent decision, mortgage loans

● Insurance – life, car, home, health

 ● Taxation – income, property, sales, etc.

● Retirement and estate planning

This book addresses all these subjects intending to give an

understanding of each to the reader. By the end of this book, one
will be able to answer all questions related to these subjects.

With this understanding, readers should be equipped to ask the

right questions and get the answers they need to reach optimum
solutions that best meet their needs. This book will equip readers
to know about the tools that exist through which they can manage
personal finances better.
 How to use this book?
The book is designed to provide an understanding of the basics
of personal finance, including an overview of the various areas
included in the scope. It also seeks to create an understanding of
how deeply intertwined personal finance is with our lives.

The book is, perhaps, best negotiated with an open mind

regarding the possibilities and the paths it could lead to and the
various options and opportunities that may be available as we
navigate the pathways of personal finance.

It should not be seen as providing the final answer to a specific

situation. In fact, many of the parts that constitute personal finance
keep changing. Interest rates go up and down. Taxation slabs
change. Environmental factors such as inflation and FED policies
also exert pressure for change. Specific, final answers should be
arrived at by seeking current information with or without the help
of specialists. The purpose of this book is to create a perspective
and overview that enables readers to appreciate the many choices
and options that are available to them.
This page is intentionally left blank
 Who can benefit from this book?
The book is primarily designed to be of use to the common man
who needs to make personal finance decisions almost on a daily
basis but neither has background or training on the subject, nor
any immediate support.

It creates a perspective for the common man, and woman, so that

there is an appreciation of the options as well as an implication of
decisions they take today in the longer run.

While creating this perspective, the book also seeks to dispel the
fog of complexity that shrouds the subject of personal finance,
creating hurdles in the path of the common man engaging with it
and understanding it.

Practitioners might also wish to use the book as a point of

reference and focus on the subject that is their area of work, be
it insurance, mortgage loans, or retirement consulting. The book
should help refresh and reset their perspective.

Of course, anyone with a desire to know more about the subject

would benefit from reading this book as well.
This page is intentionally left blank
Chapter 1

Introduction to Personal
Finance

T his chapter introduces the concept of personal finance,

the common thread that runs through many disparate
parts of our lives. While it has traditionally been a means to
achieving an end, such as buying food or renting a house,
today finance has become an end in itself. “Let us take care
of the finances, the rest will fall in place” seems to be the
thinking today. Personal finance is similar to and closely
intertwined with the concept of money.

Key learning objectives of this chapter include the reader’s

understanding of the following:

● Introduction to finance

● What is money

● The origin of money

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2 Personal Finance Essentials You Always Wanted To Know

● The value of money

● Currency and Foreign currency

1.1 Introduction to Finance

Taking a loan to buy a house is an example of a financial

transaction. As is investing money in government bonds. Or,
buying a coffee for cash at the streetside store.

Finance is an all-encompassing term, perhaps best described

through examples, as done above. It is how any organization or
person marshals the resources that can be expressed in the form of
money, that are available to them.

According to the Corporate Finance Institute (CFI), “Finance

is defined as the management of money and includes activities
such as investing, borrowing, lending, budgeting, saving, and
forecasting.”1

1.2 What is Money?

Many times, finance tends to be used interchangeably

with money. While they are closely related, they are not the
same. Moreover, finance is expressed and quantified in the

1. “Finance Definition,”Wealth Management, Corporate Finance Institute, last modified

June 15, 2023, https://corporatefinanceinstitute.com/resources/wealth-management/
what-is-finance-definition/

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Introduction to Personal Finance 3

form of money, and hence, in order to understand finance, an

understanding of money is necessary.

As human beings, we understand the relevance of money in

every sphere. In the modern world, it is used as a medium of
exchange for buying and selling whatever we want. If we want to
buy a house, we have to pay money for it. If we want to sell a car,
we will receive money for it. Money is also a store of value, the
unit in which accounting is done, and the standard for deferred
transactions.

Money can be held in two primary forms:

1. Physical cash – When I buy fruits at the local grocery, I can

pay for it in cash.

2. Money in an account – Money can be held in an account

with an institution, known as a bank, that is authorized to
do so. When I shop online, I can pay for the purchase from
the balance in my account at the bank.

The rapid spread of telecommunication technology has also

given rise to digital wallets, usually linked to mobile phones, in
which money can be held. Regulations governing money held in
non-bank wallets are evolving.

1.3 History of Money

The use of money has evolved over time. The earliest humans,
self-sufficient in the groups they lived in, relied on division of
labor as a means of equity and distribution. There was no need for
any “commercial” transactions as the group was self-sufficient.

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4 Personal Finance Essentials You Always Wanted To Know

As society developed, humans started coming into contact

with each other, and the need for transactions was felt. Systems
such as barter, which involved exchanging something for another
thing, are believed to have come into being almost 100,000 years
ago. Of course, accurate determination of the equivalence of goods
exchanged was not possible.

This gave way to the use of commodity money, which could

standardize measurement in one common unit, regardless of what
it was. A shekel, a unit of weight equivalent to around 160 barley
grains, was adopted by Mesopotamian societies. In some other
parts of the world, cowry shells gained currency as a medium of
exchange.

The use of relatively modern units of exchange, in the form of

gold and silver coins that possessed an intrinsic value for which
they could be exchanged is dated to around 600 BC.

The Song dynasty of China is believed to be the first to have

used banknotes as a medium of exchange around the seventh
century. In being money that represented value, without
possessing any intrinsic value of its own, the banknote system that
has survived till today is perhaps more similar to the commodity
money referred to earlier, than the gold and silver coins-based
system which was based on intrinsic value.

The concept of paper money then traveled to Europe with most

European powers issuing currency notes by the 18th century.
Soon after, a gold-based standard came into being which required
issuing governments to maintain gold reserves to back the
currency issued, in order to avoid reckless issuance.

By the seventh decade of the 20th century, governments, led

by the US, had started unshackling currency issuance from the

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Introduction to Personal Finance 5

gold-based standard, lending to it a certain purity in the form of

“fiat” money that derives its value from social convention and
widespread acceptance than any specific peg.

1.4 The Value of Money

The gold standard was adopted as the monetary system at

the Bretton Woods conference in 1932. Paper notes issued by the
central bank were backed by, and convertible into, quantities
of physical gold held by the issuer. Thus, the use of gold as the
medium of exchange gave way to paper currency which made it
easier to be carried and traded with.

The Bretton Woods conference held after World War II

to determine an economic system led to the adoption of fiat
currencies that were linked to one common currency, the US
dollar. The US dollar, in turn, was fixed to gold at the rate of $35
an ounce. Thus, not much changed.

When the US government suspended the convertibility of the

US dollar to gold, the backing came unstuck. This move of the US
government was then followed by other countries. In time, most
currencies became unbacked by anything other than the issuing
government’s fiat making it legal tender.

When the concept of money was evolving, there was a phase

when it held intrinsic value, such as in the form of gold coins that
could be exchanged for goods and services equivalent in value.

However, in the modern world, the prevalence is of unbacked

fiat money that derives its value because a regulatory entity
has declared it to be so. A $20 bill has a value equivalent to $20
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6 Personal Finance Essentials You Always Wanted To Know

because the government has decided it to be the legal tender

equivalent to $20 in value and the same has been accepted through
popular use and social convention.

1.5 Currency/Foreign Currency

Money being a legislated entity, its value is accepted as defined

within the governance boundaries of the authority defining it,
which is national governments. Thus, the ability of a $20 bill to
buy goods and services worth $20 is relevant only within the
United States of America.

If one goes from the US to another country, say Germany, US

dollars are of no use as the fiat currency used is different; it is the
Euro. To buy anything in Germany, the traveler would need to
have money in the form of Euros.

The other challenge that arises is that of equivalence.

USD 1 is not equivalent to EUR 1. It could be more or it could

be less. The price of one currency in relation to another is known
as the exchange rate. Most major currencies like the US dollar,
Japanese, Yen and Euro are free-floating and their exchange value
is determined based on supply and demand.

A can of Coke costing $1 in the US and 10,000 rupiah in

Indonesia does not mean it is 10,000 times more expensive in
Indonesia. All it means is that 1 US dollar may be close in value to
10,000 Indonesian rupiahs. Of course, there will be other factors
that influence price too, but the exchange rate is probably the
major reason in this case.

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Introduction to Personal Finance 7

Most of us will probably encounter exchange rates at the

airport when we travel to another country. Foreign exchange
traders will have counters at airports to ensure that people
traveling to another country that uses a different currency can
exchange their dollars for the destination currency so that they can
get around.

This is an abbreviated version of a board you might see at the

airport foreign exchange counter:

Table 1.1 Sample currency exchange rates

Currency Sign Buy Sell

Euro EUR 0.9418 0.9618
Japanese Yen JPY 136.71 139.71
Indian Rupee INR 82.59 84.59
Australian Dollar AUD 1.4851 1.5151

● All prices equivalent to $1

● Figures used only for illustration

Why are there two rates? If you go from the US to India, you
will need Indian rupees (₹) in exchange for your US dollars. When
you return from India, you might wish to exchange the remaining
foreign currency back to your own so that you can use it. If you
exchange $100 while going, you will receive ₹8,259.

Assuming you return without spending anything, and

assuming the rates have not moved, how many dollars will
you get back? You now have ₹8,259 with you. The rate that is
applicable when you return them will be 84.59. You sell ₹84.59
and receive $1. If ₹84.59 gets you $1, how many dollars will ₹8,259
fetch you? 8,259/84.59 = $97.63. This is because now the selling
rate is applicable. This also represents the margin of the traders
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8 Personal Finance Essentials You Always Wanted To Know

who incur cost and effort in offering this service and take a risk of
exchange fluctuation.

The exchange rate itself does not indicate the relative wealth or
poverty of the two nations.

1.6 Personal Finance, Corporate Finance, and

Public Finance

1.6.1 Personal finance

It deals with the management of money by individuals and
households. It encompasses income and expenditure, budgeting,
insurance, banking, investing, savings, tax planning, retirement,
and many other aspects connected with money and finance.
With the options and opportunities for earning and spending,
buying and selling, investing, and saving having multiplied, it has
become more important than ever for individuals to be financially
knowledgeable so that they are able to make decisions related to
personal finance in a manner that delivers long-term benefits.

1.6.2 Business finance

Also known as corporate finance, this area of finance deals
with the financial activities of businesses and organizations. It
seeks to ensure that money is available for activities, it is put to the
most optimum use, and external responsibilities such as taxation
and filing of returns are carried out as required. Equity or debt,
pricing, income distribution, mergers, and acquisitions are some
noteworthy business finance activities.
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