Personal finance is the science of handling money. It involves all financial decisions and activities of an individual or a household and if done right, could help mold a prosperous financial future.
Matters of personal finance include the purchasing of financial products, like credit cards, life and home insurance, mortgages and of course various investments and investment vehicles. Banking is also considered a part of personal finance, which include checking and savings accounts and 21st century online or mobile payment services.
Personal financing, if broken down generally involves analyzing one’s current financial position, predicting short-term and long-term needs and devising a plan to fulfill those needs within the financial constraints and everyday issues that an individual faces in his or her life.
Personal financing depends on one’s expenses, income, living requirements and individual goals and desires set forward by one. Among the most important aspects of personal are:
- Assessing expected cash flow of everyday lives.
- Calculating and filing taxes.
- Savings and investment.
- Retirement planning.
- Other personally related expenses for example purchase of a car, house, jewelry etc.
The importance of personal financing is often over looked, as personal finance is a fairly recent development in a place like Pakistan, even though, colleges and schools across the globe have taught aspects and importance of personal finance as “home economics” or “consumer economics” since the early 1900s. The field was initially disregarded by male economists at first. As “home economics” appeared to be the view of home-making women. However, more recently economists have repeatedly stressed widespread education in matters of personal finance as integral to microeconomics and the overall economy.
Let’s see how you can figure out your personal financing and learn to improve your money management:
- SET A BUDGET:
As mentioned in earlier blog posts, having a budget is the first mandatory step towards personal financing. A budget is essentially a financial road map and it will allow you to live within your means, while having enough left over to save for long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:
50% of your take-home pay or net income (after taxes, that is) goes towards living essentials, such as rent, utilities, groceries and transport
30% is allocated to lifestyle expenses, such as dining out and shopping for clothes, etc.
20% goes towards the future: paying down debt and saving both for retirement and for emergencies.
- CREATE A BACKUP FUND:
It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses–medical bills, or for any incidents or accidents. Financial experts generally recommend putting away 20% of each paycheck every month (which of course, you’ve already budgeted for!). Once you’ve filled up your “rainy day” fund (for emergencies or sudden unemployment), don’t stop. Continue funneling the monthly 20% towards other financial goals such as a retirement fund.
- LIMIT YOUR PERSONAL DEBT:
This seems simple enough – to avoid debt getting out of hand, don’t spend more than you earn. Of course, most people do have to borrow from time to time – and sometimes going into debt can be advantageous, if it leads to purchasing an asset like a car or a house. Taking out a mortgage to buy a house is one good example. There can be other times when leasing is sometimes the better financial move to buying outright, be it in renting a place to live, leasing a car, or even getting a subscription to computer software. This move is defined by your need and the timing of your need – if you don’t have a large savings fund, or if you have funds that are earning more money in savings, and it costs less to obtain a debt, then by all means, go for it.
- USE CREDIT CARDS WISELY:
Credit cards are usually labeled as major debt traps. But it’s unrealistic not to own any in the contemporary world, and they have uses other than as a tool to buy things. Not only are they crucial to establishing your credit rating, they’re a great way to track spending – a big budgeting aid.
Do not pay your bills late if one is using a credit card as this would completely destroy your credit score and an individual’s banking history records.
- GIVE YOURSELF A BREAK:
Make sure you allow yourself some reasonable rewards now. Whether it’s a vacation, purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.
- SAVING IS ESSENTIAL:
Saving is essential if you need to finance yourself well. Savings and checking accounts can really help you be in control of your cash! But they’re also a big responsibility. With a savings account, the idea is to keep your money in the account, where it can grow. And with a checking account, you have to be sure you have enough money to spend. Opening up a savings account would definitely help you keep your cash aside for a rainy day and cash kept at would be multiplied alongside with interest.
Personal financing is not difficult. You would just need to understand what your financial goals are before you establish ground rules for your budgeting, expenses and debts. Sometimes, comparison tools for credit cards, insurance and personal loans can be helpful in making the right choices.