One of the resources that we need to manage properly in our day to day lives is money. We can accomplish this by performing proper personal finance. This refers to all the decisions and actions which an individual or a household does in the effort of keeping track of their day to day costs. Personal finance is characterized by activities such as budgeting, saving, insurance, planning your mortgage as well as saving for your retirement. When performing personal financial planning, you identify your present financial position, predict short and long term requirements and also come up with a plan for fulfilling your financial requirements. Organizing your finances in this way is an activity that any individual or household should be able to do. Read on to learn 15 important things about personal finance that anyone needs to know.
Prioritize 20% of your income
There are some activities which bear significant priority in your life. Examples of these are saving for emergencies, debt repayment and saving for retirement. You should always consider these critical activities when you get an income. You can do this by setting aside 20% of the income and dedicating it to them.
Utilize 30% for leisure activities
You work hard to get your money. Therefore, you deserve to enjoy using it for leisure activities. Examples of such activities are going out to the club, dining out in restaurants and watching blockbuster movies in the cinema. To do this and still remain in control of your personal finance, you can dedicate 30% of your income to leisure. In this way, you get to enjoy yourself in a financially responsible manner.
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Create a calendar for your finances
In personal finance, there are some activities that should happen on specific dates. For example, you should always file your taxes every quarter and get a credit report every year. These are important processes that have an impact on your financial well-being. Missing these dates or these events can amount to serious problems for you. Therefore, you can create a financial calendar where you can mark these events and it will remind you when to perform them. Thanks to modern technology, this calendar can be synced up to your smart devices so it will remind you to perform these tasks automatically.
You can gain control over your spending by only utilizing cash
When we use credit cards to shop, we are more likely to overspend because we convince ourselves that we will be able to pay the debt at the end of the month. Moreover, we do not see how much of our actual money we are spending. This can lead to a case of overspending. If you find yourself with this problem, you can get out of it by utilizing only cash to make purchases. This shows you how much you are spending on each item you buy. It makes spending real to you and once you see how much you use, you can deliberately cut down and spend more frugally.
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Set aside some time every day to analyze your spending
It is very important to keep an eye on your daily financial activity. This can be achieved by setting aside some time every evening to analyze your spending and income too. You can use a traditional ledger book or even an application to keep track of your spending. By doing this, you can identify any problems quickly and easily. Moreover, you can observe your spending activity and set goals for yourself.
Invest in some health insurance
Whenever we get out of bed, we face a world full of risk. You are at risk of falling down the stairs, cutting yourself as you prepare breakfast or getting electrocuted as you use your appliances. As you go to work you are at risk of getting involved in a car accident or breaking your limbs. Health insurance protects you from all these risks and so many more. As soon as you begin to get a regular income, make sure that you invest in some health insurance. You can do some research and get premium quotes from various insurers. Always pick the one with the lowest interest rates yet most comfortable cover for you. In addition to that, you can further protect yourself from accidents or bad health by eating healthy and driving in a defensive manner. Also, have your car as well as your house electrical system serviced and refrain from using drugs. These activities are also a part of personal finance.
Always create a budget
Whenever you go out shopping or you are about to incur some costs, have a budget. It does not have to be complicated. A budget can simply be a list of costs that you expect in your financial endeavors. You can arrive at these costs after performing significant research. A budget helps you to stay within a predetermined amount of money. It prevents you from overspending and ending up penniless.
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Stay financially motivated
Practising responsible personal financial management takes discipline and dedication. To accomplish this, you need to be motivated. You can maintain a focused state of mind by creating a financial vision board. This is a bulletin board where you pin your financial targets. After that, you create a path of milestones that you need to achieve so as to get to your targets. This helps you to maintain a clear vision of your financial future.
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Be specific as you create your financial goals
As you create your financial goals, you need to be very specific. This means that you should attach specific dates and numbers to your financial targets. For example, you can set a target that indicates the amount of debt which you need to pay off and the date when you hope to achieve this. Moreover, you can create a target that indicates how you are going to do this and the hours of work or investment that you need to apply. This sort of detailed goal-setting ensures quality personal finance.
Create a fund for emergencies
An emergency fund is a very important financial resource to have. You can create it by squirreling away some money whenever you get an income. Your emergency fund is one of the reasons why you should pay yourself first. No matter how much money you are making or the debt which you have, an emergency fund requires that you deposit some money in it for any unforeseen financial requirements which you could have. This fund is non-negotiable. This means that it demands that you deposit some money in it no matter what. Also, you should ensure that you save this fund in a secure and rewarding location that can easily be liquified. Examples of such locations are a savings account that has high interest, a money markets account or a certificate of deposit account.
Start saving for your retirement right now
Despite seeming like it is a million miles away, retirement is an important factor to consider even when you are young. The main reason to do this is because retirement savings accounts work using compound interest. By its very nature, compound interest can ensure that the little amount which you begin with in your retirement savings account grows until you have a substantial amount of money by the time you retire. You can get retirement plans from the company which you work for. You can also get them by approaching a bank or a credit union. Getting and maintaining a retirement account is one of the activities which you can perform for the purpose of personal finance.
Analyze your interest rates
Part of personal finance is taking out loans. In these, you get some money from a lender and are supposed to return it with some interest. You can take out more than one loan at a time. Always ensure that you pay off the loan with the highest interest rate first. When picking out a loan, try to find the one with the lowest interest rates that you can find. Also, credit cards normally have compound interest rates attached to them. Therefore, losing control of your credit card debt can get you neck deep in financial trouble. These are some of the interest rates which you should keep an eye on.
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Find out your net worth
Your net worth is calculated by deducting all your debt from your assets. If you get a positive number as the result, then you are financially afloat. However, if you get a negative one, then you are bankrupt. Always perform a calculation of your net worth as you move forward in your financial life. It can act as a warning mechanism to guide your investment decisions.
Understand how to calculate your net income per month
One of the concepts which you need to understand even before you get your first salary is how to calculate your income taxes. The moment a company mentions or gives you the first salary or paycheck, you need to know how to calculate your taxes so as to distinguish between your gross and net income. Nowadays, you do not have to do this manually. There are applications and web services that assist you to do this automatically. It is important to calculate your net salary so as to know if it will satisfy your personal and professional needs.
Protect your assets
Insurance is a very important and necessary tool to have. You can use your insurance cover to protect your assets from accidental fires, burglary or damage. For example, you can invest in some renter's insurance to protect the contents of your home. You can also invest in disability insurance to cover you if you are unable to make an income. You can also invest in the services of a financial planner. This one will give you unbiased financial advice which works in your best interest. Moreover, perform some tax planning. You should also protect your wealth from inflation by investing in vehicles that are minimally or not affected by it. These activities are essential in personal finance.
The Important Take Away
Planning your personal finances is a very important activity that you should perform. It helps you to understand where your money is going on a regular basis. It is never too early to begin personal finance. You should do it as soon as you begin to make an income. The tips above can help you to begin your financial journey. Learning them can save you a lot of headache and ensure that you are in control of your financial future.