Personal finance refers to all aspects of money management, including saving, investing, budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. Additionally, the phrase is frequently used to describe the industry that offers financial services to people and families, as well as providing financial and investment advice.
Furthermore, personal finance is concerned with achieving personal financial objectives, such as possessing enough money to fulfill immediate financial demands, retirement plans, or investing in your child’s college education. The successful execution of each of them relies on your income, spending, living needs, and personal objectives and desires. It also depends on your ability to devise a strategy to meet those needs while staying within your financial restrictions. It’s critical to become financially literate in order to discern between good and bad advice and make informed decisions with your money.
Plan Your Budget
To avoid falling into debt, it is important to spend less than you earn. An efficient way to avoid debt and reach your financial goals is to plan your budget accordingly. The point of a budget is to get a clear picture of where your income is going and cut out unnecessary spendings. You’ll need to be focused and disciplined to prioritize your efforts on money-making ventures, assess the benefits or disadvantages of your actions, and restrain yourself from spending on unproductive assets. One of the best budgeting frameworks is the 50/30/20 framework and it goes thus:
- 50% of your after-tax income goes into your essentials such as rent, utility bills, food/groceries, and transportation.
- 30% of your income is allocated to your “wants”; the things you’ve been looking forward to acquiring such as clothes and furniture.
- Lastly, 20% of your income after tax will be saved for future goals and emergencies.
Today, there are several “budget apps” that make the process of planning your budget much easier.
Put Your Money to Work
Generally, everyone who works aims to achieve financial independence. While planning your budget is the first step, it is not enough. To achieve financial freedom, you need to invest your savings in profitable business ventures. You can invest by buying company stocks, which gives you partial ownership of the company or you can invest in bonds by lending money out and getting it back with interest.
It is important to note that stocks have a better success rate than bonds. According to Jeremy Siegel’s “Stocks for the Long Run”, stocks have produced an annual return of 7% for the past 20 years, a value that doubles every 7 years (accounting for inflation). In contrast, bonds have produced a mean return of 4.5%, which doubles every 16 years. However, if you need your saved money in the short run, stocks might not be the right call for you as the market may be unstable, and this can cause you to lose money.
One of the reasons for saving 20% of your income is to prepare for the unexpected e.g. accidents. One of the most effective ways of preparing for the unexpected is to get insurance. Accidents can cause damage to your body or property, therefore, you may need to get medical treatment or replace your damaged property.
Your insurance provider would be liable to take care of the bills, therefore, you can save yourself from these kinds of unplanned expenses.