What is personal finance? Personal finance is basically the fiscal management that a family or an individual performs during their lifetime, to plan, save, and invest money, taking into consideration various economic risks and potential future life outcomes. Although some experts define personal finance as managing one’s own money, it is actually much more. It involves how individuals and families work together to organize and manage their financial resources. This means using financial tools such as savings accounts, investment securities, and personal credit cards to help them develop and monitor long-term financial strategies.
So how can one tell if they are on track with personal finance? One way is to set realistic, practical goals for saving and spending. The first step is determining what these goals will be and why saving and spending should be done versus other alternatives. Goals must also be specific and attainable so that savings and spending will be a consistent part of daily life. For example, saving for a child’s education may mean buying a home instead of renting, giving away some college funds to help pay for college, or starting a part-time job to supplement income.
The second step to personal finance is planning and creating a budget. A budget is simply a list of expenses and revenues, with each item (revenue) broken out into its separate categories. In addition to budgets, there are several other financial tools that allow people to track and analyze their finances: Tracker, Personal Finance Assistant, Bank Statement Software, Loan Modification Calculators, Personal Finance Worksheet, and Loan Estimator. These three key pieces of financial software will help you plan, monitor, and evaluate your finances.
The third and most important step in personal finance is investing. Investments are simply money put in a bank or another financial institution to gain interest. These investments are either long-term (such as bonds or mutual funds) or short-term (such as CDs). Regardless of where the money is invested, it is expected to gain interest; thus, the goal is to accumulate as much interest over the years as possible.
To effectively invest, you must also set aside a little every month for retirement planning; this money can be put towards saving for a pension, paying off the mortgage, or saving for your children’s college education. The goal of saving for retirement planning is to ensure that you have enough funds to live the lifestyle you have always wanted to when you are no longer able to work. This process of saving for retirement planning should be an integral part of your personal finance planning.
While the above three steps are great ways to start your personal finance education, the fourth step may be even more important. It is this final step that will ultimately lead you to financial success. The fifth step to your financial education is to use this knowledge to create your own budgeting and investing techniques. By utilizing the methods you learn from the previous steps, you will be able to determine what investments to suit your needs best.