Personal finance is the management that an individual or a household performs on an ongoing basis to plan, save, and invest money, taking into consideration various financial dangers and future financial opportunities. There are various types of personal finance and it can be categorized into two broad categories, namely asset-based and task-based. The process of saving for retirement, paying off debts, buying a home, and saving for education are all part of asset-based personal finance. Task-based personal finance includes saving for day-to-day expenses such as groceries, clothing, and housecleaning.
The process of saving for retirement, for example, involves a variety of strategies. The first step is to determine how much Social Security will be taken and used for the rest of the working years. The second step is to determine the amount of employer provided retirement benefits and whether these will be invested, according to the wishes of the employee. Finally, the third step involves using 401k funds and other individual-directed investments to finance these retirement and other long-term expenses. These three steps in the process of personal finances can be simplified into three keys: keeping track of your expenses, knowing what you have and where it is going, and relying on others to provide the needed support.
The key to saving for retirement is to keep track of your expenses. This is done by identifying specific, everyday expenses such as gasoline for transportation, food, and drinks. Expenses can also include mortgage and insurance payments, utility bills, taxes, and other payments that are for items that are not normally available in a home. Some households use a credit card to pay for their daily expenses while others do not. Regardless of the method used to fund these necessities of life, the ultimate goal is to eventually have money left over after paying all expenses.
Another component of saving for the future is to know where this money goes. One of the most common methods for doing this is to invest the funds. Many financial experts advocate using a stock market or bond fund as a means to generate a steady cash flow during retirement. A great way to begin investing is to learn about the various types of individual investments and the pros and cons of each one. Most importantly, take the time to decide which of these investment vehicles best fits your individual needs. This includes deciding if it makes sense to invest in stocks or bonds and how much risk is acceptable.
Once you have determined which investing options are right for you, budgeting and savings strategies can begin. Once again, the goal of personal finance and investing is to have enough money to cover all expenses while still having some money leftover for rainy day, unexpected expenses, or even to put towards retirement accounts or other investments. This process is simple: once you know the difference between your bottom line income and expenses, stick to a strict budget and set savings goals; then, use a smart investing strategy to earn extra income or to save for retirement.
One final note on retirement savings: you should always have a liquid reserve at your fingertips for those things like medical emergencies, home repairs, or the unexpected. However, saving for these types of things through a regular savings account may not be a good idea. If you must, find a professional that can help you set up a customized, tax-efficient IRA account specifically for these types of things like medical bills and home repairs. As a final word, one thing that you should never do is skip either the education or the subsequent discipline of financial management just because you are retired. You will be glad that you did and will have years of rich material to draw from when you need it the most!