The ability to manage your finances properly is the first step to achieving that financial goal you have in mind. Whether you are a spendthrift or not, you still need an understanding of what personal finance basics is all about.
It’s benefits are endless.
Take a look at the richest man in the world today – Elon Musk. With all his finances and riches, you never hear where he was seen making unnecessary purchases.
Musk is so invested in his company Tesla, that when it progresses, he progresses. Some times he sleeps in his factories with his workers.
Now, you may be wondering, what would a man who has it all possibly be doing in a factory?
Truth is, he had basic understanding of personal finance right from his young age and that greatly benefited him.
So, if you want to learn what he knows on personal finance, it’s no mysterious thing. Just keep reading this article.
What Is Personal Finance?
Personal Finance is a term that describes the process of managing your money in the form of budgeting, saving, or investing. It is a broad term that describes banking, insurance, mortgages, retirement planning, tax, and several other activities that you do with your money.
When planning your finances, you would take into consideration the several risks associated with finances and future life events that are bound to occur.
Additionally, you’d check out several bank products and discover which of them suits your needs. Bank products range from checking accounts, savings accounts, credit cards, to investment private equity that includes the stock market, bonds, and mutual funds.
In general, personal finance is needed to help an individual or a family make meaningful financial decisions in their life.
Why Is Personal Finance Important?
Personal finance is about meeting your personal financial goals. Hence, its important you plan your finances properly to enable you have enough for all of your financial needs. Whether its for short-term financial needs, planning for retirement, or saving for your child’s needs. It all depends on how you manage your personal finance.
It is very important that you take charge of your finances. However, there are more pressing reasons as to why you really need to do so.
#1. No formal education for personal finance
Experts say that to properly manage your finances, you need to become a financial literate. However, most countries do not have formal education on how you can manage your personal finances.
As an individual, you learn how to manage your personal finances on your own, mostly through personal experiences. There is no formal education at the elementary or basic levels that teaches you how to manage your personal finances.
No straightforward curriculum that teaches you the difference between needs and wants to help you make better financial choices. Instead, individuals pursue learning to earn a livelihood.
This shows that it’s important to learn about personal finance as early as you can. As there’s no laid down rule you can refer to when the debts keep piling up and you are overwhelmed with all your expenses.
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#2. The expenses never end
Whether you have an income or not, there’s always something that needs your money. It could be the medical bills, rent, house mortgage, groceries, etc.
In the US, medical insurance is covered by employers, private insurers, or the federal government. In fact, it is mostly for senior citizens and still doesn’t include some medical bills like chemotherapy. While in Europe, most of the medical care is nationally reimbursed.
Regardless, you still have other expenses and if you don’t have a basic knowledge of personal finance, you may go into depression.
#3. Ensures that you maximize your money
Having good knowledge of personal finance will make you look beyond money being a reward for working 30 hours a week. You’d realize that it is a tool to having financial security and aceiving that financial goal you’ve always wanted to achieve.
It enables you have a plan for your money and how you can maximize it to work for you. Additionally, you’d be fully equipped with the knowledge that you need to face financial challenges, opportunities and responsibilities.
#4. Manage your income
It’s in human nature to please ourselves. We’d naturally shy away from pain and move towards anything that gives us pleasure.
This means that if you don’t plan your income, you are more likely to spend it all on buying trivial things that you really don’t need.
However, with proper knowledge of personal finance basics, you can manage your income in such a way that you spend what is necessary and invest or save the rest.
Additionally, you’ll know which expenses are most important and which should come later. Then you’ll know which to pay for taxes.
#5. Financial security
Financial security is something that everyone dreams of. Everybody wants to be assured that they can cater for the needs of their family whether the economy is failing or not.
The COVID 19 Pandemic really showed everyone the importance of financial security and how having a savings you can rely on in difficult times helps to save lives.
No one wants to think that they’d go broke or begging when difficult times come. Hence the need for personal finance.
Good knowledge of it gives you peace of mind. As you are rest assured that regardless of whatever happens, you have the finances to literally keep you alive.
Types of Personal Finance
Earlier in this article, I told you that personal finance is a broad term that describes all you do to manage your income.
Similarly, it’s the combination of several areas that make up personal finance. Hence, for you to have a comprehensive understanding of it. We need to discuss these areas in details.
The areas of personal finance include;
- Income
- Expenses
- Saving
- Investing
- Insurance
#1. Income
Income is a source of cash inflow that an individual receives according to a period of time. According to Wikipedia, it is the sum of all the wages, salaries, profits, interest payments, rents, and other forms of earnings received in a given period of time.
You can receive income through different sources which can be in form of salaries, bonuses, wages, dividends, and pensions.
In general, you can say that income is anything that brings money into your pocket.
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#2. Expenses
An expense is the outflow of money to another person or group usually to pay for another item or service. (It is not an investment).
According to Wikipedia, it is an outflow of money, or any form of fortune in general, to another person or group to pay for an item or service, or for a category of costs.
Expenses can come in different forms. For a house, its expense is called rent, for students or parents, tuition is an expense.
In general, expense is anything that takes your income out of your pocket. If your expenses are greater than income, then you really need to be careful as that’s a red flag and you may be on your way to a lot of expenses.
#3. Saving
Saving refers to the amount of money left from your income after you have done all your expenses. If there’s a surplus from what you earn and what is left after spending, then that is your savings.
Savings is the most critical aspect of personal finance. This is because, your ability to manage your finances and save determines if you really have a basic knowledge on personal finances.
Fortunately, there are several methods of savings. Financial institutions have created several means through which individuals can either get reward for their savings or save their savings.
Although it’s good to have savings, it is not advised to have lots of it, as it doesn’t return any interest rates. Which is definitely not what you want. Because you want to continuosly increase your income.
#4. Investing
Investing involves putting your money into a business that generates rates over time. There are several investment platforms designed to help you get the value for your money and even more.
Conversely, Investing can be very risky. This is because some investment opportunities may seem fruitful initially but due to bad investment strategy, things can go south.
Regardless, there are some trusted investment opportunities like; stocks, mutual funds, bonds, real estate, private companies, etc.
#5. Insurance
Insurance refers to protection against unforeseen circumstances to a property. There is a wide range of products designed to offer protection to the property. They include; Life insurance, health insurance, and lots more.
Insurance is another area of personal finance where people seek professional advice. Things can easily get complicated so it’s best to seek professional advice who can carry out several analyses to determine which insurance is best.
These areas, when put together form personal finance, make it a very vital part of human existence. This is because managing your finances well can even elongate your life.
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Proper Personal Finance Management Strategies
Personal finance is a must for everyone. So, the earlier you learn how to manage your finances, the better. Here are the best tips and strategies to win this thing called managing your personal finance.
#1. Create a budget
Preparing a budget is essential for managing your personal finance. It is your best shot at achieving that personal financial goal you have set for yourself.
According to Investopedia, one method that proves to be most effective in creating a budget is the 50/30/20 percent rule. Let me explain.
- 50% of your income goes into settling all monthly expenses (e.g electricity/water bill, taxes, and several other living essentials.
- 30% of your income goes into settling personal needs ( e.g money for shopping, salon, etc)
- While 20% of your income goes towards your future. You can use it to save or invest.
The truth is, its not easy to manage your money. However, with the range of available budgeting apps, you can stick to your financial plan and hit your goal.
#2. Reduce debt
This is pretty straight to the point. Reduce debts. Don’t spend more than you earn. resist the urge to always go for something you can’t afford. If you can’t afford it, then take your eyes off it. Don’t even go into debts. But if you do, then don’t let it go out of hand.
Conversely, debts can be advantageous over time. Especially if it leads to acquiring an asset, or is more economical at the moment.
Regardless, try to stay within your budget. I think its the most important personal finance basics you must learn. As it’ll help you manage your finances properly.
#3. Use your credit cards wisely
Although it’s almost impossible to not have a credit card in today’s world, it’s more important that you use it sparingly. This is because they can be very tricky.
I’ll explain. Using your credit cards can help to improve your credit ratings and track your spending. Which is totally good for managing your personal finance. But, if you keep making purchases, you may forget to pay your bills. And one way to ruin your credit score is to pay bills late.
In general, just manage your credit cards correctly.
#4. Monitor your credit score
Your credit score is determined by your credit card. So, monitoring your credit spending goes hand in hand with monitoring your credit score.
This is because, if you want to obtain a mortgage or any type of financing, you’ll need to have a solid credit history. Factors that determine your credit score include your credit history, credit payments, and your debt-to-credit ratio.
Usually, credit scores are calculated between 300 and 850. So aim to be somewhere between 650 and above.
It’s best to set up an automatic payment system where you get directly debited to pay your bills monthly. This way, you never miss a payment.
Additionally, you can subscribe to receive free credit score updates, to enable you to monitor your scores well.
#5. Create an Emergency Fund
Before going on a spending spree, ensure you have some money saved up for emergency situations.
As humans, we live in so much uncertainties and urgencies. The car can go bad, your spouse can suddenly fall so ill, the rent may become due sooner than you expected. Hence, one way to ensure you are prepared for any situation is to create an emergency fund.
Financial experts generally suggest that you save 20% of your income monthly for emergency funds. It’s not a one time thing, continuously save your 20% every month. This way you are building your future.
#6. Pay off your student loans
As soon as you have a stable income source, pay off your student loans. There are loan-payment reduction strategies available to graduates.
If you can’t pay all the loan at once including its interest, you can pay off the principal amount first before the interest rates.
Additionally, if you can minimize payments to just the interest rate, then by all means do so. It saves you a lot of money and you can invest it somewhere else.
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#7. Remember your family
If you have built your personal finance up to a point where you have a lot of properties and assets, you can ensure your wishes are safe when you die by creating a will with your lawyer.
You can also teach your children the value of money at a young age to enable them to manage your finances and properties better when you hand them over to them.
Depending on your needs, you can set up a few trust funds for them too. Either way, look into several financial management structures and determine which will be best for you and your family.
#8. Save for Retirement
The best time to start saving for your retirement was yesterday. The more time you waste in starting your retirement fund, the longer you’d have to work before you retire.
You wouldn’t always be this young, strong and vigorous. Maximize this moment now and save towards your future.
Although there’s no particular amount that you’ll need to save for retirement, I suggest you save multiple amounts of your salary as you get older.
For example, At 25, your income is $100/hr. So you can save $20/hr towards your retirement. Now at 40, you work at the best Law firm in New York and earn $500/hr. You can now save $100/hr for retirement. Now that was your entire salary at 25.
The aim is to have more times your salary as your retirement fund as you grow older.
Additionally, you can use special accounts that give you beneficial tax breaks. According to CNBC, Many workplaces offer retirement accounts that you contribute to, such as 401(k) and 403(b) plans — the former by private employers, the latter by nonprofits and the government.
With both 401(k)/403(b) plans and IRAs, you may be able to choose between a “traditional” account or a “Roth” account. The difference is when you grab your tax break.
#9. Make use of your tax breaks
Every year, save receipts and track expenditures for all possible tax deductions and credits. A tax reduction deduces the amount of tax you get to pay on your income. While a tax credit reduces the amount of tax you owe.
So figure out when you have any and focus on taking advantage of the opportunity when the time comes. This is one of the personal finance basics you must learn.
#10. Invest
After you have saved up your millions for just saving purposes or retirement, give yourself a break and invest. It’s time to make your money work for you
Get a brokerage firm if you can and have them manage your investment portfolio. You are permitted by the god of finance to enjoy the fruits of your hard labor.
Personal Finance Software
Choosing the best personal finance software depends on what your financial goals are. Some software help you with budgeting and expense tracking, While others help you with investment management.
Regardless, I recommend you clearly define what your financial goals are and use software that helps you meet that target.
Below are some free and paid personal finance software that you can use.
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Personal Finance Books and Courses
To get the best knowledge about personal finance from experienced financial analysts, I suggest you take personal finance courses on Coursera and Udemy.
These online learning centers have proven to give out the best knowledge in collaboration with top schools in the world.
What is the 72 rule in personal finance?
It’s a simple method for figuring out how long it will take for your money to double. You need only divide 72 by the interest rate you intend to receive. This figure tells you roughly how many years it will take for your investment to double.
What is the 10 rule in personal finance?
The 20/10 rule also divides your after-tax income into three main spending categories: You put aside 20% of your income. Your debt repayments, excluding mortgages, take up 10% of your income. All additional living expenditures are paid for with the remaining 70% of your income.
What is the 50-30 20 budget rule?
The 50/30/20 rule is one of the most widely used percentage-based spending plans. Spend 50% of your money on necessities, 30% on wants, and 20% on savings after dividing your income into these three categories.
What are the 5 areas of personal finance?
Five categories make up personal finance. They consist of income, investment, expenditure, protection, and savings.
What is an example of personal finance?
Personal finance includes all aspects of money management, such as budgeting, goal-setting, and investing. Budgeting, retirement planning, and setting up money for your kids’ college expenses are also important.
How much savings should I have at 40?
The consideration of your retirement objectives may be increasing. If you make an average salary and follow the conventional rule that you should have saved around three times your pay by the time you’re 40, you should have saved a little over $175,000 by that point.
Is it too late to save for retirement at 45?
It’s important that you hear us when we emphasize that it is never too late to begin saving for retirement. There is always something you can do, regardless of your age or how much (or how little) money you have saved so far.
Conclusion
A proper understanding of personal finance basics and management will help you live a better life.
Don’t wait till you start earning in tens of thousands of dollars before you save. The time to save and manage your finances is now.
I hope this post helps your financial life.
Good luck!
