We’ve all been there, unsure of our finances, worried about how to manage our money and plan for the future. The world runs on money and our lives revolve around it, and despite that, there is a severe lack of education and discussion on personal finance. It is a mystery and continues to remain a taboo topic amongst friends and family. It’s time for us to learn how to save and invest our money through the basic understanding of personal finance.
The notion is that finance relates to company earnings and mega-merger deals, but in reality, finance starts and ends with individuals, and for an individual, the most important aspect of their lives is their financial situation.
A company’s finance essentially boils down to a few key principles and personal finance, at its core, is quite simple.
As intimidating as it may seem, anyone can learn to control the money that flows in and out of their bank account and make investments that will grow their earnings over a period of time.
Let’s get started on the changes one can make to meet their future financial goals:
- Discovering and Setting Goals
Asking yourself what money means to you is the first step in determining your approach and philosophy to personal finance. Personal finance is just that, personal.
There are certain aspects that are applicable to everyone’s financial lives, but you must choose aspects that are most important to you.
Everyone should include the cost of shelter, clothing, and food while budgeting, but where you wish to live, how regularly you wish to eat out and what type of clothes you wish to buy is essentially up to you.
Prioritizing taking a family vacation every year or putting money aside to pay for college tuition is a personal decision and the order of priority must be determined by you while setting financial goals.
Your financial journey begins with deciding on a real goal and vision that will drive you. Being honest about what you want is imperative.
- Personal Finance Rules
There are two basic rules of personal finance that everyone should know:
a. Spend less than what you earn
One cannot save money if they are spending more than they are earning. Spend less than what you earn and put away the extra savings in investments or an emergency fund.
b. Make your money work for you
The primary purpose of saving is to ensure that we have a financial reserve we can tap into whenever required. One must also invest these savings to earn in the background while we sleep or go about our daily lives.
- Control Spending
It’s really easy for us to spend money without thinking about where we are spending it.
A simple exercise one can conduct is to list out everything they spend their money on, this includes both big and small purchases. This includes bills like rent, utilities, phone, etc., small luxuries like fancy coffee or drinks with friends and major and minor emergencies.
Your monthly spending will fall into two major categories – fixed and variable expenditures. Fixed refers to those expenses that remain constant every month like rent, water, electricity, groceries, food, and transport. These expenses are important and money should be allocated every month to pay these off. These are broadly referred to as necessities.
Variable expenses are generally things that aren’t purchased regularly. One can save the most amount of money by cutting back on variable expenses as they aren’t necessities.
Taking a holistic view of expenses, one can decide which expenses to cut back on. That saved money can be put away to help achieve goals or towards clearing debt.
- Create a Financial Plan
In order to achieve your financial goals, you must create and stick to a financial plan. This plan will include how you spend and save your money.
When money has been earmarked for the future and a specific purpose, you are less likely to fall off track by making unnecessary purchases.
Maximize your savings early on. The more you save early on, the more money you’ll have to start investing. The earlier and sooner you put your money into investments, the earlier they can start earning profits.
- Control Debt
When an individual is saddled with debt and high interest, they end up using their money to pay interest, charges, and penalties. When these are added up, it’s a considerable amount of money that could have gone into savings instead.
The most important part of personal finance is to reduce debt as much as possible and as soon as possible. The primary way to spend extra money is to save and pay off debts.
- Develop a Long Term Investment Strategy
Once you’ve paid off a majority of your debt and have a large amount of savings in your account, it’s time to begin investing that money.
Time is critical when it comes to investing. The earlier one invests, the greater the growth potential for their money.
There are several ways one can invest – putting money into stocks, mutual funds, bonds, starting a business or purchasing real estate. There are positives and negatives to each kind of investment, and it’s essential to know how each investment vehicle works before signing up.
For example, when it comes to mutual funds, you should know what they invest in, who manages the fund, what is the expense ratio and if there is any exit load for taking your money out.
It really is as simple as it looks. You know now the basics of personal finance to get started on your financial improvement journey. By spending less, saving more and investing more, you can generate sufficient money to meet any of your goals. Think deeply and honestly about what you want from life and start saving to make it happen!