In this fast-moving world, where every person is focusing on earning more money, no one has time and plan to save this hard-earned money for future. Personal Finance Management is necessary to manage your incomes and plan your investments in a way that can help you to earn more returns. In this article, we will learn the basics of personal finance management.
Personal finance management refers to managing money earned from different sources of incomes. It includes diversifying the earned money in such a way that it not only fulfills the today’s needs but also secures our future.
Personal Finance management includes making investment plans, tracking all the incomes and expenses, managing debts and repayments, tax planning and retirement planning. This industry involves various businesses and people which helps the households and individuals to manage their funds in an effective manner.
Key Points –
- Personal finance management requires better understanding of the terms related to the industry and implementing them in the real life.
- Personal finance not only helps to secure our present but also helps to manage emergencies and unforeseen events.
- This can be thought of a regular process which needs to be performed at equal intervals to ensure consistent benefits.
Importance of Personal Finance Management
- Financial Independence and Security – Personal finance management helps to provide funds in case of medical emergencies, unexpected car repairs or job loss. It provides financial independence so that one can focus on the present without stressing about the future unforeseen events.
- Better decision making – Understanding basics about the personal finances helps the individuals or the households to take better financial decisions and can improve their financial planning skills. There are various alternatives available in the market for investments, by comparing all these options and selecting the one with better understanding can lead to better investment portfolio and higher returns.
- Stress reduction – Managing personal finances can reduce financial stress up to a great extent and can lead to better life. Unexpected emergencies can create financial anxiety and can make you fall into a debt trap. Investing and managing the finances can reduce these kinds of stress and can avoid falling into a debt pit.
- Debt Avoidance – one can not completely avoid taking loans in their life, but we can avoid falling ourselves into a debt trap. Good financial management strategies can provide better alternatives in place of taking a debt. It is necessary to manage all the incomes and savings to avoid taking multiple debts. And in case, if someone has taken loan try to pay the dues on time to avoid affecting it on your credit score.
- Retirement readiness – personal finance management helps individual to plan their life in the old age. It ensures that one should have a comfortable lifestyle in the stage where there is no active earning source of income.
Concepts Related to Personal Finance Management
It is crucial to understand the terms which are related to personal finance management so that we can understand the strategies in a better way.
- Income – Income refers to all the cash inflows an individual is receiving from all the possible sources of income. It only includes the earning which is regular in nature. It is the initial point of the personal finance management process. It is the amount which is completely available for regular expenses, investments, savings and for recreational activities.
- Expenses – Expenses refers to all the cash outflows available for rent, loan mortgages, groceries, entertainment etc. These are the crucial part of personal finance management. One has to keep regular track of all the expenses so that it can be managed in a better way. An important point to keep in mind is expenses should never be more than the income or else it will gradually make you fall into a severe debt trap.
- Budgeting – Budget is a detailed statement of all the incomes and expenses for a fixed time period. It is a detailed process where one has to mention all the possible sources of incomes and all the possible areas of expenditure. It helps in managing the personal finances by continuously keeping an eye over all the expenses and eliminating unwanted spendings.
- Savings – Savings are the leftover amount after all the major expenses. It has a very important role in managing the personal finances. It has to be used efficiently so that it must be available in case of any emergencies as well as for the future unforeseen events.
- Investing – The part of savings which can be used to purchase assets either in the physical form such as real estate or in the intangible form such as shares or mutual funds’ investments. By understanding the essentials of personal finance management, one can invest in various areas can earn a good return on these investments which can be added to the passive source of income. But these options come with different levels of risks associated with itself, so need to be chosen carefully.
- Debt Management – Debt management involves understanding the various types of debts available such as housing, automobile, personal, education etc. and choosing the one which suits the requirement. It helps to improve and maintain a good credit score which proves the credibility. But one need to be very careful while opting for this option as it involves timely payments of instalments and if failed to do so can lead to negative impact on credit score.
- Retirement Planning – Personal finance management is a great way to ensure a consistent income even after you stop working. Good Retirement planning strategies can help one to live a comfortable lifestyle without being dependent on others.
- Insurance – Insurance policies protect individuals and households to keep themselves protected from the unforeseen circumstances which can create financial stress. Different types of insurance policies are available according to various situations it caters such as health, life, automobile, home etc.
Managing your personal finance is a continuous process which requires effective planning and disciplined implementation. By proper savings, budgeting, debt management one can easily achieve financial goals. Keep reading us to have step by step guide for personal finance management.
