What is Personal Finance? The Basic Principles

This is back to the basics, reminding things over and over helps the concepts get deep into our minds. This is a self-reminder as well to keep me on track and remain debt free for as long as I can.

Personal finance is a wide subject, it consists of behavior and practices to control spending to provide maximum and sustained value out of the money throughout the life. This practice should start when we start our career. Spend control and delay gratification at an early stage are very much important if we want to live a happy and contented life in future. The day people understand the importance of managing personal money the journey towards financial freedom would start.

I had previously written about 50 money rules that everyone should follow this can be a good starting point. These were what my father taught me by his actions, more than spoken words, during my early days as school going student. To date, those are the best lessons I learned on personal finance.

According to Investopedia, the definition of personal finance

Financial planning can best be self-accomplished, off course it’s my own opinion. All you need to know is basic mathematics and basic human psychology to plan all your finances. If required, you can seek help from the certified financial planner or from a money Coach, they are the specialized solution provider for your financial trouble.

I have many acquaintances who successfully came out of debt with the help of a financial planner. And, I am still debt free sans any qualified expert’s help. Showing you the picture from both sides, you make your best judgment as to whether you need a professional help or not.

Essentials of personal finance

The scope of personal financial planning covers these aspects of our life.

• Earning
• Saving
• Expenses
• Budgeting
• Taxes
• Insurance
• Loans
• Investment
• Debt Management
• Estate planning

Your income determines your financial muscle power. The more income you have the better life you can lead. People might argue that income doesn’t always bring happiness, I respect them and respectfully deny them. At least I get happier when I earn more money. I certainly get more pleasure by having physical goods I crave for. Although, I am a big advocate for becoming emotionally, spiritually, socially rich.

In order to grow your income/assets, you need to work towards Salary Increase and find passive Income sources to diversify income.

Your savings secure your future life from monetary trouble when you no longer be working for income. You should always save some part of your salary so that you can have enough money to manage your own expenses when you retire. Personal finance is also about controlling shopping addiction and controlling impulse buy.

While saving is important, personal finance is also about spending Money on self-improvement and about finding a balance between earning and spending and not missing good opportunities to spend.

A budget would take you to the path of the most basic personal finance fundamentals, earning more and spending less. With a budget,

• You can prioritize expenses, determine which expense is required, which can be deferred.
• You can control your day-to-day finances.
• You can take into account the unexpected need for funds.
• It checks you from overspending.
• You can start researching on alternative investments if you see surplus cash in future months.

Another fundamental aspect of personal finance is keeping records of financial transactions. It provides the foundation for everything else to build on. Keeping records means keeping track of all of your financial transactions. This includes what you earn, what you spend, what and where your savings are. Record keeping enables us to understand what’s our financial position is now and how you’ve progressed over time. It will also provide valuable input into the future financial planning process.

These are the crux of personal finance and we should always plan and provision for. We should always spend the money carefully and should save it for future use. You should try to cut back your expenses without sacrificing fun, look for fun which is available for free and feel richer in life. We should care for our money should remain debt free.

Having necessary and sufficient insurance coverage is one important aspect of managing personal finance. We don’t want to see our hard earned money to be wiped out by an act of nature and negligence. Whether it’s house, car, health or even life, we need to make sure we have enough insurance for anything worse happen to us.

Tax and risks are two very important but often ignored aspects of personal finance. File your tax returns on time every time and safeguard wealth from natural disasters.

When we start our career we should put our best and should become one of the most valuable employees. We should also try to get self-employed, being a salaried employee we probably won’t ever work to our full potential. We should be on a lookout for opportunities and take risks to become richer in life.

Loans are as essential as anything else in the list. Although loans on credit cards are bad, loans towards your mortgage are perhaps unavoidable. A person should manage a good credit to secure a loan at a cheaper cost.

If your credit is not good you may need to pay higher interest on your loans.  Managing personal finance thus requires you to manage good credit score. Fix your bad credit and get your score higher before you apply for a big loan.

You should always make saving a fun and be a motivated saver and save regularly and should invest in such a place where to earn interest/dividend. We should prioritize savings goals and save for retirement. We should consider various investment options and diversify our investment as much as possible in 401 (k), Roth IRA, Stocks, CDs, Saving accounts, bonds, money market etc. This is how you would be able to manage your finances and make your future life better and comfortable.

One day you will not longer work, your money should be prepared to work on your behalf. You would be able to have enough money when you retire and don’t become a burden on your children.

Death and taxes are the two certainties of life. While nobody likes to talk about their death, it’s important to consider your estate. How should it be distributed once you’re gone? Make your will now provision for your death-related costs. Plan about the estate when you can.

Readers, do you think the topics cover this broad area well? What questions/suggestion you have for another reader?