What is personal finance?

Definition and Examples of Personal Finance

Personal finance describes how you save, spend, and invest the money you have (your financial resources). If you are good at managing money, you are good at personal finance, and vice versa.

Personal finance refers to how you spend, save, invest, and manage the financial resources you have. It is important because it determines the type of lifestyle you can enjoy now and in the future. At a basic level, personal finance is about spending less than you earn and using what’s left to achieve your goals. You can enhance your financial literacy by seeking out personal finance podcasts, books, apps, and other resources.

How Personal Finance Works

You may have heard your grandfather say, “Live within your means and save the rest.” This is the essence of personal finance – making smart decisions about your money now so that you have freedom and options later.

Loren Zangardi Heinz, a financial advisor at Spark Financial Advisors, defines personal finance as more than just budgeting. It’s understanding credit cards, how compound interest works in your favor (or against you), understanding tax-advantaged saving vs. pre-tax saving, planning for rainy days, making housing decisions, and saving for college and retirement. It’s interwoven into our daily lives at every corner.

Heinz went on to say that understanding personal finance is essential to reduce anxiety about money. You don’t have to be an expert. You just need to know the basics.

How Can You Be Good at Personal Finance?

Being good at personal finance is about making your money work for you – no matter how much you have.

Ksenia Yudina, founder and CEO of Unst, said, “Money touches all aspects of life, and if someone doesn’t know how to manage it, it can lead to troubled heads and constant stress. Once a person understands their financial situation, they can spend their time focusing on what matters most in life.”

Here’s how to become good at personal finance:

Set Clear Financial Goals

Have a vision of what financial success looks like for you. You might have a credit score above 800, retire by age 50, or help your children avoid a student loan crisis. For others, it might be about driving a luxury car or owning a second home by the beach.

No matter what your goals are, you need to create a clear framework to achieve them if you want to succeed. Set your goals wisely. Make them specific, measurable, achievable, realistic, and time-bound.

Start Budgeting

Learning to budget is one of the fundamentals of personal finance. This involves tracking your income and expenses so you can see where your money goes each month. When done correctly, budgeting puts you in control of your finances and allows you to spend more on the things you love by spending less on the things you don’t. There are many budgeting apps to help automate the process.

Build an Emergency Fund

If you often feel like you don’t have enough money to pay the bills, an emergency fund can provide some relief. It’s one of the fundamentals of personal finance because it offers a safety net to cover any unexpected events (like your car breaking down or your cat needing an emergency vet visit).

Many financial advisors recommend keeping three to six months of essential expenses in your savings account for an emergency fund. If that seems daunting, you can start with a small amount like an initial fund of $1,000 or one month’s worth of expenses. Anything is better than nothing.

Pay Off Debts

Debt

Getting out of debt can be challenging. But there are many reasons why repayment is important. Getting out of debt increases your financial security and gives you more money to spend on things you enjoy, and it improves your credit score.

Creating a plan to pay off debt can be one of the best things you can do for your personal finances — especially if you have high-interest debt. “Getting rid of high-interest debt should be a top priority when it comes to personal finance,” according to Yodina. “This type of debt can quickly spiral out of control and undermine any financial plan you have.”

Starting to Save for Retirement

Saving for retirement has all kinds of benefits — you can deduct contributions from taxes, build savings for the future, and you may even get some extra free money if your employer offers matching contributions.

Many financial experts recommend saving 15% of your pre-tax income for retirement. If you aren’t saving anything right now, at least contribute enough to get the full employer match, if available. Then consider maxing out contributions to a Roth IRA before going back to your 401(k). (This is a common guideline for retirement savings people follow.)

Stick to It

The goal of personal finance is to spend less so you can save and invest more money. Although this is a simple idea to understand, it can be challenging to stick to it when you have the pressure of marketing messages telling you to buy more and more and more.

When you’re planning to buy something, ask yourself: “Does this thing bring me one step closer to the life I want to live? Will I enjoy this purchase or am I just buying it because I want to buy it?” By asking yourself such questions, you will guide your spending according to your values and reduce the chances of wasting money on something that distracts you from your goals.

Increase Your Financial Awareness

When you have financial literacy, you understand all the facts, tools, and principles you need to make smart decisions regarding money. Unfortunately, financial literacy is not taught in many school systems in the United States. You have to seek out this information if you want to be successful with your finances.

Here are some resources you can access to increase your financial awareness:

• Personal finance podcasts
• Personal finance books
• Personal finance software

References:

– Finance. “How Much Should I Save for Retirement?” Retrieved on November 19, 2021.

Source: https://www.thebalancemoney.com/what-is-personal-finance-5210266