How to Manage Personal Finance?

Personal finance is a common term used when referring to money management for an individual or a family, which covers the aspects of budgeting, investment, savings, mortgages, retirement planning, also including estate planning and tax.

Sometimes it is used to denote industry as a whole, which is focused on providing advisory on retirement savings, life insurance, investment options in stocks and bonds, among a few. This way it is different from corporate finance advisory which deals with fundraising, public finance, and taxation, thus maintaining focus on corporate, and not individual, affairs.

Unfortunately, personal finance is a topic often overlooked by major educational institutions and other public establishments. However, it is important to realize that a lack of knowledge in the area of personal finance can often lead to unreasonable financial decisions that will affect your life at a later point in time. That is why it is essential to build your own knowledge based on available means, such as libraries, online courses, podcasts, blogs, and tutorials. 

Since personal finance centers around individual financial goals and has a large degree of independence, the correct approach to the matter is crucial. The personal traits such as self-discipline, persistence, and motivation can play a big role in achieving financial success and driving financial targets, especially when practiced from early stages.

Main Principles of Personal Finance

At the core of managing your own money lies a set of rules which is ought to be followed. Below, we consider the main ones:

• Your spendings should not exceed your earnings

This principle will help you to put aside a certain amount every month rather than spending all of your income on immediate expenses. The golden rule says that you should follow 50/30/20 principle – using 50% of your income to cover incurring bills (such as housing, utilities, groceries, etc.), allocating 20% for your financial targets (both immediate – paying off debt, and long-term ones, such as retirement and emergencies) and leaving 30% for yourself (dinners, shopping and other forms of entertainment).

That keeps a perfect balance by giving you a sense of financial freedom and nevertheless assisting you greatly on your path towards a financial goal.

• Think of alternative ways to grow your income

Receiving a salary is a good way to maintain a stable income flow; however, if you think that you can multiply it, why not to try? There are various ways to increase your income, among which is finding a higher-paid job, negotiating a salary raise, freelancing and even starting your own business.

Apart from that, investing in stocks and bonds can be a good choice too. All of these ways require an extra effort, but eventually, you will ripe off the benefits of your hard work.

• Take charge of your credit score

However obvious it may sound, a good credit score gives you many lurks and perks. From borrowing at a lower interest to being a premium cardholder, this is all accessible for responsible credit owners. Also, there is a possibility of improving your chances of renting an apartment and getting better deals for car insurance.

Even though it sounds like a big thing, being a responsible credit holder is not as difficult as it may seem – all you need to do is to maintain a stable track of credit, without going too much into borrowing, and pay your bills in a due manner.

• Start saving for retirement early

Many people ignore the fact that retirement savings need to be practiced from very young ages. Saving early gives a lot of benefits, including tax breaks that are a part of 401(k) program, and compound interest. This way, the wealth is accumulated fairly easily, which almost gives you a guarantee that at pension age you will be stress-free. However, one condition should not be overlooked – in order to be effective, the retirement fund needs to be topped up every month.

• Get ready ahead of emergencies

When something unexpected strikes, we tend to regret not playing out all possible scenarios beforehand. That’s why it is important to remember that emergencies take place in life. The best way to combat them is to be prepared once something unexpected comes – and start putting aside for a rainy day as early as possible.

Creating an emergency fund is useful for a variety of reasons, not least because the interest it accumulates can result in an extra gain. In the ideal-case scenario, you should dispose of sufficient fund to cover three to six months of living, but be patient – this amount will not come in one day.

Financial Health and Keys to It

Anyone involved in personal finance should be aiming for sound financial health. But what exactly is it and how do you improve it? Financial health is a snapshot of your current financial situation. It gives an idea of how much savings you have, how much of your income goes on debts and current expenses, what fraction you are putting aside for retirement and emergency. There are other questions you may ask yourself to estimate your financial health, such as:

• Your net worth – is it positive or negative? To find this out, just subtract debts from all of your assets.
• What is your Debt-to-Income ratio? That is, what fraction your debt takes of your income? In order to find out, divide your total debt on your total gross income.
• What proportion of your debt falls under high interest rate? Normally, this one has to be paid first to avoid further accumulation.
• Is your insurance coverage sufficiently covers both health and life? If not, you may consider expanding it.

Generally, financial health is a fluid concept by itself and to achieve one, you should develop a financial plan. There, you should pay significant attention to budgeting, debt, and emergency fund. First, budgeting is not only about the future planning of your spendings, but also reviewing your past transaction history – once you identify the weak areas of where you could cut off on expenses, encourage yourself to take proactive steps.

Next, paying off your debt may not be easy, but you can opt for paying the highest interest debt first and then focus on all remaining. Finally, an emergency fund may not be easy to accumulate, but try saving a certain part of your income on unexpected occasions, and you will be rewarded.

 There are several tips for everyone who either wants to improve or keep in a good share their financial health:

• Try keeping down your rent or accommodation expenses to not more than 40% of income;
• Automate your debt payments – set recurring transfers from your bank account on regular expenses;
• Search for banks offering commission-free maintenance and attractive credit card offers;
• Set up your insurance.

Personal Finance Strategies

You may also ask yourself how to manage your personal finance successfully. Here’s the answer:

• Define your financial goals. This makes it easier if you break it up into small pieces, or short-term goals, which will eventually lead to a bigger improvement. It is helpful when one creates a budgeting plan (You Need a Budget app can help you out with this) or keeps a track of spendings (Wally is a good app for that), this way showing good control of your own finances not allowing them to go off-track.
• After some money free up, start investing. You may consider a wide portfolio of already well-established FAANG stocks or any other company from S&P 500 index, or alternatively, opt for something riskier such as venture capital. Also, cryptocurrency derivatives and ETFs are becoming a popular choice nowadays, too.
• Stick to a budget. After you created a financial plan, try not to be going beyond what was established. This is the most important point to succeed financially. In order to achieve results, you should constantly be focused on prioritizing what is most important for you, assessing risks and returns (especially when it comes to investment) and restraining from unnecessary expenses.
• Do not go too much into debt. This can be especially dangerous when you are using a credit card – this is the easiest way of falling into a debt trap. To avoid this, consider going for a debit card – it has similar benefits but does not allow you to spend more than you earn.
• Seek for advice. Don’t be afraid to take a step forward and consult on your financial decision with a professional. Likewise, it can be a mentor or any other person familiar to you, even your family member. The most necessary here is the necessary level of competence and the ability to answer your question.

Conclusion

For every person, it is fundamental to gain a basic understanding of personal finance and be aware of its main principles. This is important because the right approach to personal finance will inevitably lead to sound financial health and financial maturity.

Once you start keeping your budget in a good shape, you will be able to achieve any kind of financial aspirations – from buying a house to having a stress-free retirement, which allows you to feel the tangible benefits of your hard work.