What Is Personal Finance: Overview & Strategies.
Many people feel trapped in the clutches of financial prison where money is never enough. Living from pay-check to pay-check seems to be the world’s new normal. Covid-19 has thrown many personal finance plans into disarray for many households. Debts are piling up, and with the little you earn, you are wondering how to meet ends. The answer is having sound personal financial planning.
This article will help you understand what personal finance is and will provide you with strategies to gain financial freedom through it. You will learn how to lay solid groundwork for a stable financial foundation that will leave your family relieved.
The term personal finance has been used when discussing subjects about managing money, savings, and investing. It includes budgeting, insurance, banking, investments, mortgages, tax, estate planning, and retirement planning. Personal financing also describes the entire industry providing financial services to households and advising them on investment and opportunities.
However, the simplest understanding of personal financing is that it is one’s ability to plan and meet their short-term and long-term financial goals, such as paying the immediate bills, saving up for a child’s education, or planning for retirement.
These goals are all dependent on your income, living expectations, expenses, and desires, hence the need to devise a workable plan to fulfill these needs subject to your financial constraints. It is also important to be financially literate as this will help you distinguish between faulty and good advice to make informed decisions.
Table Of Contents
- 1 Principles of Personal Finance Planning
- 2 8 Best Personal Finance Strategies
- 3 Conclusion
Principles of Personal Finance Planning
Before understanding strategies of how to be good at managing personal finances, you should learn the basic philosophy associated with money management. There is no magic or a new set of skills in getting your finances in good shape. The principles that businesses use to succeed in managing money are the same in personal money management. These principles are as follows:
This principle advocate looking into your finances, decerning what brings money in, and ensuring you focus on those efforts.
Assessment is an important skill that deters professionals from narrowing themselves. It enables you to assess your environment and list ideas of additional ways to add to your income, whether it is an investment idea or starting a side business. Like business finances, an individual should step back and evaluate the costs and benefits of any new venture they plan to pursue.
The restraint principle is also called big-picture skills that have been used by successful businesses and must also be used for personal finances. This process involves analyzing your expenditure versus your income and making the necessary adjustments. It is important to exercise restraint in spending on assets that do not build wealth until you have reached your monthly debt reduction and saving goals.
8 Best Personal Finance Strategies
Strategies and time are required essential ingredients to detangle oneself from the chain of financial deprivation and debts. It is neither too late nor too early to set financial goals to provide you and your family financial freedom and security. You may also take assistance of personal financial software packages to get your finances under control. Let’s discuss some practical steps and tips to gain control of your personal finance.
Devise a Budget
There is a common adage, “if you do not plan to succeed, you are planning to fail,” and this statement is aptly true with personal finances. A budget helps you to plan so that you can live within your means and adequately save for long-term goals.
With a budget, you have a clear road map that shows you your money and what you do each month with it. The 50/30/20 budget can provide practical guidance on how to plan with your money well. This formula advocates the following:
- 50% of your net income after taxes you can take home and use for living essentials, such as utilities, rent, transport, and groceries
- 30% of the income should be allocated for miscellaneous or discretionary expenses, including shopping for clothes, dining out, and charity.
- 20% should be used for the future, such as savings for emergencies, retirement, or paying for debt.
Drawing up a budget has never been easier, thanks to several personal budgeting apps, spreadsheets, and software that you can install in your smartphones to help track finances at the palm of your hand.
After budget creation, you see what expense takes much of your money and trim unnecessary expenses. Some budgets may need cutting back on little things, while others may need deeper cuts to widen the gap between monthly outflows and inflows. Some of the expenses you could eliminate include recurring obsolete membership or unnecessary subscription services.
You could make also bigger decisions, such as mortgage refinancing or eliminating a fraction of your spending, such as dining out. Benefits of cutting your expenses include freeing your budget, thus limited reliance on loans and credit cards. It also enables you to add more money back into the budget’s debt payment or saving category.
Creating an Emergency Fund
When you receive income from any source, ensure you “pay yourself first” by allocating money for unexpected expenses, including big car repair, medical bills, and daily expenses if you are out of a job. These savings should be equivalent to three to six-month living expenses.
Several financial experts suggest setting aside 20% of every monthly paycheck. Once this goal is achieved and the emergency fund is filled, continue contributing the 20% to meet other goals, such as house down payment or retirement fund.
The rule on debt management is- do not spend more you earn and live below your means. Although there are good debts such as taking a mortgage to purchase a house; however, leasing a house could make economic sense if your budget is constrained than buying.
If you are already wallowing in several debts causing anxiety, then it is time to take stringent measures to meet these obligations. The snowballing method has worked for many, in which the money set aside for investment is channeled towards paying the smallest debt moving to the biggest debt. You can only invest after you are fully paid off all the debts.
Save for Retirement
Since few companies provide full pension plans and uncertain social security, it is vital to set aside part of your income for a retirement plan. Many people are worried that they do not have enough to save for retirement after monthly expenses; nevertheless, you can reduce some expenses to save for the future when you are not working with careful planning, discipline, and sacrifice. Retirement savings should be prioritized instead of being an afterthought.
For example, in the United States, the Internal Revenue Service makes retirement saving attractive by providing special tax benefits, including individual retirement accounts, employer 401(k) plans, and unique retirement accounts for the self-employed.
Make Wise Use of Credit Cards
Credit cards are good, enabling you to buy goods for later payment; however, they can be a debt trap, therefore use them with caution. You can use your credit cards to improve your credit rating and to track your spending, thus helping with budgeting aid. Nevertheless, it is wise to manage the credit by paying off the full balance every month before the balances spiral out of control.
This way, you improve your credit score and remain viable for a mortgage loan in the future. When using credit cards, remain at the minimum credit utilization ratio and benefit from cashback incentives that come with paying bills to the full. It is better to rely on debit cards, ensuring you use the money in your bank account rather than a credit card that uses the money you do not have.
Monitor Your Credit Score
A good credit score tells potential lenders that you are credit-worthy and can make your loan processing easier. Building a credit score depends on your usage and management of credit cards. In the future, when you need a mortgage, a lease, or money from any financial institution, a solid credit report may win you the deal. One of the popular credits score you can use to determine your creditworthiness in the FICO score, determined by the following factors:
Payment history (35%)
Credit utilization score (30%)
Credit history (15%)
Credit mix (10%)
Credit inquiry (10%)
FICO score ranges between 300 to 850, with 800 – 850 being (exceptional), 740 -799 (Very good), 670 -739 (good), 580 – 669 (fair), and 300 – 579 (Very poor).
Credit scores can be obtained from three national bureaus, include TransUnion, Experian, and Equifax. Additionally, you can obtain a free credit score from sites like WalletHub, Credit Karma, and Credit Sesame, offering you a credit score from VantageScore.
Educate Yourself on Personal Finance
Several schools are available the provide courses on personal financing at a considerable fee. However, you do not have to sign up for a formal school to learn personal financial planning. The internet is full of self-help books that can give you a head start in this course, in addition to financial blogs detailing the process of personal finance.
YouTube has many videos and podcasts that discuss finances, with interviews of people who have succeeded in managing debt, growing capital with little earning, and simplified life for financial freedom. The internet provides a free university, where you learn things that truly work in the real world if you know where to find this information.
If you desire financial freedom, personal financial planning is a must. Learning how much you earn and then planning is the first step to managing your family finances. That means drawing up a budget and sticking to it so that you can know which expenses are unnecessary for the cutback.
Putting your finances in order requires self-discipline, dedication, and sacrifice; however, the sacrifice is worth it. Your family will be happier; you will have less anxiety and gain more control of your expenditure, income, and investment. Remember, the future of your finances is in your hands.