Ultimate Guide To Improving Your Personal Finance7 mins - Introduction
Personal Finance is a comprehensive approach to using the techniques and methods of corporate finance in managing an individual’s money and financial affairs. Basically, Personal Finance has everything to do with YOUR money and assets. The process involves planning and managing all of your personal financial activities; income, savings, spending, investing & protection.
The above-mentioned five areas are considered to be the most important ones in the process of personal finance. Let’s discuss them in a little more detail so that you may have a clear understanding of this term.
Generation of income is the starting point of an individual’s or a family’s journey of financial planning. Income just simply refers to the sources of cash inflow received and used by an individual or a family to support themselves. The most common sources of income include hourly/weekly wages, salaries, bonuses, commissions, dividends and pensions.
Cash inflows from all of these sources can rightly be used to save, spend or invest.
This area covers all types of expenses incurred by an individual or family when purchasing services or goods or anything that can be classified as being consumable-this excludes investments. Spending diverges into two categories: cash and credit. The former involves spending by paying with cash in hand while the latter involves spending by paying with borrowed money. Common sources of spending include rent & mortgage payments, food, entertainment, taxes, interest and credit card payments.
All expenses reduce the cash available to an individual for saving or investing. You really wouldn’t want your expenses to exceed your income and this is an area that is in your control, unlike income. Controlled and monitored spending can help in reducing the burden on your income.
Saving refers to surplus cash that is ‘saved’ and retained to be used later in the future. This surplus cash results when the income is greater than the spending and can either be saved or invested. The management of savings is a crucial part of personal finance. The most common savings options include paper money (physical cash), savings & checking bank accounts and ‘money market securities.
It is common for individuals to have at least some savings in any form to deal with any unexpected events and manage their cash-flows well.
Investing involves purchasing assets, usually long-term, that can be expected to generate some returns for the investor. Purchases are made by investors with the hopes of receiving more money than the amount invested initially. Investments carry risks for the investor as not all rate of returns turn out to be positive. The most common investment options include stocks, mutual funds, bonds, real estate, private companies (shares) and valuable art pieces.
This area of personal finance is considered to be the most complicated one and many people tend to receive professional financial advice in this matter to make the most ‘profitable’ investment.
Personal financial protection refers to the variety of different ‘products’ that can be helpful in providing financial protection against unexpected and devastating events. Common protection ‘products’ that exist today include health insurance, life insurance and estate planning.
This area is another one that has some complexities involved and is usually managed with help and advice from professionals.
Tips to Help You Successfully Manage Your Personal Finances
All of these 5 areas of personal finance discussed above need to be managed carefully and smartly for you to rid yourself of financial problems and worries in the present and future. Starting today, you can surely work on improving your current money situation! Just follow the following easy steps and you will start noticing the change in your financial position. Your financial problems may even start to diminish if you stay committed!
Define Your Financial Goals Clearly
Assessing your goals and listing them specifically is key here. Sit down and think about what your long-term and short-term goals are. Things such as holidays, investment and retirement plans are going to define your goals.
Once you have written out your financial goals, start prioritizing them. Creating a priority list will allow you to deal with each goal in the appropriate manner and also pay attention to what is most important. This is a crucial step as prioritizing will essentially help you in creating a relevant financial plan that aligns almost precisely with your goals.
Create a Plan
Developing and implementing a financial plan will ultimately help you in achieving both your long and short-term financial goals. A rough draft of your plan may involve the creation of a monthly budget & a spending plan and trying to pay the debt.
After trying out and working with this short plan and achieving those goals, you may start seeing some financial improvements in the form of excess cash resulting from reduced debt payments or controlled spending. Now is the time to update your plan, set new goals and prioritize them according to your current situation.
Remember that sticking almost religiously to your budget is key here as there is no room for unplanned and over-spending until you have reached financial stability.
To successfully manage your personal finances, you need to stay focused on your long-term goals (e.g, retirement plans) but also actively keep working on reaching the near-term goals. Hence, creating & updating time relevant and specific plans will help you significantly in allocating your financial resources appropriately.
Get Out of Debt
The burden of debt can be a plague for you when it comes to achieving financial stability. The sooner you get rid of this plague, the better it will be for you! Hence, once you start working on your personal finances, make it a point to not miss any debt payments.
If possible, direct any excess cash towards a debt account. Keep doing this every month, targeting and eliminating each debt account and you will find yourself free of debt after some time. Freedom from debt will ultimately reflect positively in your personal finances in the form of more cash available for you to spend, save or invest.
Don’t Hesitate In Seeking Financial Help
Once you believe that you have enough savings and you wish to build your wealth, you can turn to financial planners and advisors. These experts will be able to provide you with a detailed cost and benefit analysis of each of your investment options and will give you suggestions that will help you in maintaining your personal finances well in the longer-run. So, don’t hesitate and contact one if you have idle cash wasting away in bank accounts!