Personal finance is a concept that has a lot of overlap with budgeting and saving. It is essential to be organized so that personal finance is effective for all individuals. Budgeting and saving are all essential towards financial security, but many people also find personal finance to be a challenge. Personal finance is the discipline that an individual or a family performs to plan, save, and budget-financial assets over the long term, considering various future life events and financial risks.
A common mistake made by most people is not putting sufficient funds aside for retirement, when planning. As an adult you should be prepared to save for at least 25% of your annual income, including overtime, health care, house payment, auto payments, and any other miscellaneous expenses, to meet your long-term personal financial goals. This means that you need to know exactly what your long-term personal financial goals are, so you can set up a plan to achieve them. A common goal for most people is to achieve a comfortable retirement. However, even after retirement, you need to set aside funds to fund additional dreams or desires, such as college education, travel expenses, a new home, or a hobby.
One major part of personal finance planning involves setting up a household budget. Household budgets are designed to provide a concise overview of all current expenses and total income. A household budget is a tool for assisting individuals and families in reducing their total income through frugal living, increasing savings, and making prudent spending decisions. By planning and analyzing current and future expenses, a household budget assists in long-term planning and future savings.
The three keys to successful personal finances are prioritizing, allocation, and monitoring. Prioritizing is the process of finding those activities that provide immediate benefit, and then focusing on those activities. Important areas of focus include discretionary income, current investments, total debt load, spending to reach desired goals, and life expectancy. A good way to ensure you’re sticking to your budget is to set a spending limit for each category. In addition, you should also develop a balanced budget by establishing recurring expenses and a reasonable estimate for future expenses. Monitoring your spending and overall financial health allows you to identify areas in need of improvement.
The fourth key component of successful personal finance involves effective and efficient budgeting and money management. Budgeting helps you understand where your money is going and when it is coming in. Proper budgeting also helps you establish monthly cash flow management. Cash flow management is a key concept in personal finance because it helps you understand when you have excess funds, when you need to make emergency purchases, and when you should slow down spending due to existing debt balances. A good cash flow management plan allows you to identify opportunities to save and invest for the future.
Finally, budgeting, allocation, and cash management are essential elements of successful personal finance education. Budgeting allows you to set and meet realistic goals; it teaches you how to properly spend your money; and it develops personal budgeting skills. Debt management teaches you how to avoid the destructive cycle of debt accumulation and repayment. Finally, budgeting, allocation, and cash management helps you to make informed financial decisions that can have a real impact on your financial well being and future. This type of education gives you the tools, information, and strategies necessary to make better financial decisions in the here and now and in the future.