Personal finance is the ability to manage one’s money to enable them to make informed decisions that will lead to financial stability and growth. The basics of personal finance includes budgeting, emergency funds, management of debt, saving, investing, and planning for retirement. All of these help assure a secure future in your daily lives. We will help you cover these key elements so that you understand what to do to be in control of your finances.
Budgeting
This is the foundation of financial management. It helps you track your income and expenses, ensuring you work towards your financial goals. You can develop a good budget by looking at the sources of income you have and your expenses. In deciding on what to include and not to include in your expenses; you must break your costs into essential and non-essential costs. With those, you should be in a position to then set realistic financial goals like saving for a vacation or paying off debt that you should be able to aim for through your budget.
Key components of a budget:
Income: This is what you earn, it can be active income like a salary or passive income in the form of dividends.
Fixed expenses: The periodic bills you get with an amount fixed, viz., rent, loan, etc.
Variable expenses: These are the expenses that change month by month. This would include groceries, trips, entertainment, etc.
Savings: This is when you set money aside for future goals.
Download your personal budget template from here.
While budgeting you should keep the following points in mind:
Avoid impulse spending and plan for reasonable expenses.
DO NOT ignore small expenses.
Save a little each month, do not keep anything for future.
Aways be ready for the adjustments in the budget. Do not follow a rigid plan. It should be flexible in nature.
Emergency Fund
These are the money kept aside for unexpected expenses, like medical bills, car repairs, or a loss of job. So an emergency fund is very much needed as a safety net. The savings must be done in order to retain an ability to live three to six months in case of any unfortunate incident. This is the basics of personal finance which one should follow.
Emergency funds will reduce financial stress and bring peace of mind with security not to fall into the trap of credit cards or loans in times of emergency. Without maintaining an emergency fund, one is bound to fall back onto credits and loans during tough times, which worsens the financial condition. Keep your emergency fund openly in a high-yield savings account to maximize your savings while you keep the money readily available. Especially after the 2008 crisis, many people realized the importance of it.
Debt Management
Not all debt is created equal. Good debt, such as a mortgage or student loan, can be an investment in the future. At the same time, bad debt, such as high-interest credit card debt, is going to be the roadblock standing in your way of financial progress. The effective management of debt is the key towards financial stability.
Out of the various techniques to pay the debt, the following two techniques are very popular in personal finance:
Snowball method: Paying off the smallest debt balance regardless of the interest rate on it. It gives you a psychological boost since you get to clear the smaller debts quickly.
Avalanche method: Prioritizing repaying the loan with maximum interest rates attached to it. It saves a lot of money on interest paid in the long run.
Furthermore, one should maintain a decent credit score because it is not only showing the ability to borrow money, but it helps operate with favorable terms. A better credit score can be achieved via regular payment, reducing the percentage of debt to the income, and not frequently opening up new credits.
Savings
It is one of the fundamental and vital aspects of personal finance that serve to enhance one’s wealth and help reach long-term financial goals. Saving, unlike investing, is putting your money aside in safe, liquid accounts. Set clear goals regarding what you are saving for, whether it be for having money by you in case of an emergency, buying a home, or wanting to live comfortably when you retire. Automate your savings with the use of automatic transfers from your checking into your savings account. Besides, reduce unnecessary spending to free up more money to save.
Investing
It is the act of putting your money into assets such as stocks, bonds, or mutual funds with the expectation of earning a return. Understanding the fundamentals, specifically the relationship between risk and return, is basic to the growth of wealth over time. You should diversify your investments across different assets. Different assets have different performances, allowing a mix of them to give better returns. It is a way to make your money work for you. You should do your own research before making a choice, and learn investing. Do not fall for traps like “How to become a millionaire with no money ?” , “How to get rich fast ?” , etc.
Financial literacy
This is the drive to understand and practically apply the different financial skills, which include personal finance, budgeting, and investing. The drive for every person should be to build their knowledge in financial matters. Some of the most useful learning resources are books and blogs. You can also update your knowledge by attending some courses and following financial news. Some of the good resources are “The Psychology of Money” written by Morgan Housel, its one of the best finance books and the other various websites to study finance online are Investopedia. Join the waitlist of financeacademy.app to get exclusive benefits on the courses.
Start on the road to your personal finance journey today and take charge of your financial destiny. Subscribe to our blog for more personal finance tips and tricks, and download our free budgeting guide to set your journey in the right motion. Your path toward a secure financial future begins today with us!
