Did you know that 25% of Americans worry about money all the time? Not often, and not sometimes. All the time, all day, every day. And no wonder. With 80% of Americans chained to an unending cycle of debt, financial security becomes more of a daydream than an actual achievable goal.
That’s where personal finance comes in. What is personal finance? Well, you’ve come to the right place to answer that question. Just keep on reading for a full breakdown of personal finance, how it works, its main components, as well as why it’s so essential for financial —and mental— health.
What Is Personal Finance?
In the simplest of terms, personal finance is a term that refers to the financial management of an individual or a family’s resources.
It tackles money management through expenditure, investments, and savings. Also, it includes a variety of other financial aspects like banking, budgeting, retirement planning, insurance, and even state planning.
It’s an umbrella term for everything that will touch a person’s finances during their lifetime. Furthermore, you’ll find that personal finance tends to focus mainly on empowering an individual to reach their short and long term financial goals.
For instance, if you’re stuck in living paycheck to paycheck, personal finance will give you the necessary tools to break that cycle through effective budgeting.
Why Is Personal Finance Important?
We can boast about the benefits of personal finance until we run out of writing space. Yet, here are the top highlights of what personal finance can add to your life.
Meet Your Money Needs
A huge part of the money stress and anxiety that’s so common in today’s society is due to an imbalance between your needs and having enough money to meet them.
With a solid personal finance plan and budget, you’ll be able to truthfully assess your financial situation and see it for what it is, not what you’d like it to be.
Once this step is concluded, you’ll be able to establish how much is your income, your expenses, as well as your short and long term financial goals. This will broaden your perspective beyond just focusing on earning money. It’ll extend to what you’ll be doing with your income and how to properly allocate it to meet your needs.
Easily Manage Your Income
Properly managing your income is the key to financial security. It’s the ability to identify how much to spend and how much to save or invest. This can only be accomplished with the help of a proper financial plan.
Moreover, you’ll be able to effectively allocate money towards your tax payments, savings, as well as your fixed monthly bills.
Increase Your Cash Flow
Another aspect of personal finance is having a solid idea about your current cash flow, and identifying ways to increase it in the future.
Personal finance will help you learn how to keep track of your expenses, as well as your spending patterns. This will allow you to fix any mistakes and fortify weak spots in your spending. This —in turn— will allow you to have higher levels of cash flow.
Furthermore, there is a variety of higher cash flow aspects that can help you attain financial security in the long run. For example, by having higher cash flow reserves, you can start tax planning and carefully budget to avoid losing any of your money to unnecessary expenses that could have been avoided by planning.
Manage Debt and Tackle Unmanageable Ones
Nothing can break a great financial plan than dealing with an unmanageable debt or floundering on managing debt in general.
In this day and age, having a few debts tends to be unproblematic (for the most part).
However, being overly in debt is another thing entirely. It’s an active danger to both your current and future finances. Therefore, it’s key to be able to manage your debt in a smart way that will not jeopardize your financial stability in the future.
That’s where the benefit of personal finance comes in to save you from yourself. By integrating a financial plan when managing debt, you’ll be able to avoid overspending, as well as allocate the right amounts to paying off your debts without crippling your daily spending habits.
Besides, having a spending budget will prevent you from overusing your credit cards. That’s great for preventing adding more debt to your current load or creating new debt in the future.
What Are the Main Components of Personal Finance?
Personal finance is a bit more complex than balancing your checkbook and sticking to a rigid monthly budget.
A good financial plan will need to be aligned with your short and longterm life goals. To stay on the right track and achieve these goals, you’ll need to have a thorough understanding of each aspect of your finances.
You won’t be able to manage your money if you don’t have any on hand.
This category includes all different revenue streams, not just your paycheck. As one of the primary steps to creating a financial plan would be taking a thorough look at your income.
Taxes are unavoidable in life. Therefore, you’ll have to be prepared for it in your plan. Getting familiar with state taxes, taking advantage of tax relief opportunities, as well as checking out the tax benefits of homeownership is an essential step for your financial health.
In the U.S., there will be no escaping insurance. And, in most cases, you wouldn’t want to do so in the first place.
Having insurance on hand will help cushion any nasty surprises like car accidents, home damage, illnesses, or even disability or having to take time off from work.
Using insurance the right way will enable you to create a safety net that will be quite useful as time goes by.
As we previously stated, it’s more likely than not that you have debt in one form or another. As it stands, some debts are better than others. For example, having home loans or student loans can be seen as investments in your financial future and its growth.
On the other hand, we have what’s known as bad debt. This type of debt comes from buying things that you don’t need, and it tends to add up fast. Being able to know the difference between the types of debt, in addition to how to manage them is essential to a financial plan.
This way you’ll be able to pay off your debt promptly and in a way that doesn’t hurt your financial health and credit score. An example would be having bad credit scores that will affect your mortgage rates.
Of course, at this point, you’ll be quite familiar with what expenses entail. It’s everything that you take from your income to spend instead of designating to save or invest.
The key here is that your expenses should never be higher than your income. Any imbalance to your income-expense equation will lead to bad debt.
Some people like to view savings as an “expense” by making it a habit to deposit a part of their income right into a savings account.
It’s a deposit that will pay for your future goals with the added benefit of earning interest.
We’ve all heard that it’s never too early to plan for retirement, which is true. Of course, planning for retirement and having the right accounts and benefits available to you might vary by employer and location.
Yet, no matter what your options are at the moment, it’s essential to start having money socked away for retirement as soon as possible.
Investments are savings on steroids. It’s the best way to let your money grow exponentially with no added effort on your part.
Learning how to invest is a crucial part of learning how to manage your money and have healthy personal finance.
How to Manage Your Finances
The best way to start your personal finance journey is by detailing your financial goals, then creating a budget for them.
You can start by identifying your specific long-term financial goals. These can range from buying an investment property to retiring early. Afterward, create a list of your short-term financial goals. Short-term goals can be as early as this week to something you’d like to do this year.
Now that you have your goals in one place, you can start allocating specific budgeting goals to achieve them on both a monthly and a yearly basis.
Ready to Take Charge of Your Financial Life?
We know that it can be a bit terrifying to look at your credit score after spending months (even years) avoiding it.
However, there is no other way to fix a problem and turn it into strength than assessing your current financial health. Then, you can create personal financial plans to reach a healthy financial status and plan for future prosperity.
Now, you’re in a much better place having the answer to the question “what is personal finance?”
Yet, managing your finances is a life-long journey. As such, there is still so much more to learn. Make sure to check out our blog for all the financial knowledge you could need.