What is Personal Finance?

Personal finance is a term that comprehensively defines how you manage your money in terms of savings and investments. While it runs down to your income, expenditure and personal goals, financial planning includes short-term goals like banking, budgeting and long-term goals like mortgage, insurance and retirement planning.

Finance is essential daily, especially if you want to push the limits. However, to succeed in planning for your money, you’ll need to engage financial consultants for a guide on prioritizing your goals amidst the financial constraints you face. But why is it important? Read on!

📌 Why Is It Important?

While we cannot exhaustively explain why personal finance is essential, the fact remains that it affects our daily life. Since the reasons are several, let’s look at the major ones.

✅ Avoid Unmanageable Debts

Having debts is a healthy way to grow your wealth. However, too many unmanageable debts are risky and drain your financial muscles over time. The best way to keep off unmanageable debts is to avoid overspending. That is spending more than your income.

Financial literacy helps you solve this by guiding you on leveraging your income and expenditure without straining. You also understand that you don’t need a lifestyle change with increased revenue.

✅ Improves your Relationship with Money

You can have a bad relationship with your money when you cannot account for every coin you earn. It’s contributed by the skills that you gained when growing up. If you keep repeating the same mistakes, you’ll have a negative attitude toward your money leading to misappropriation.

Understanding financial management helps you improve your relationship with money –you can plan for long-term projects without feeling burdened.
It helps you to budget, save and spend your Money

Personal financial planning helps you budget for your income before spending. It’s critical to understand that the power behind budgeting before income –enables you to distinguish between wants and needs. It also helps you analyze your priorities and keep you from unnecessary spending.

Sometimes you can earn a lot of money, yet you’re always in debt. The problem trickles down to how you plan your budget and manage it. Another person makes little, yet they’re doing so much. The differentiator is the way you budget, save and spend your money.

The skills you gain in financial management lessons help you to get closer to your goals by watching your budget and avoiding overspending.

✅ Improves Financial Security

When working, you always hope to have financial security –you no longer worry about job loss or any other shortcoming that negatively affects your income. As some people call it, financial freedom is vital for anyone with a future and more so if you have a family. To attain financial security, you’ll need financial management knowledge.

Financial security comes from bonds, insurance, real estate investment or money market funds. You only need to plan for your income to make it a success.

✅ Helps Grow your Asset Base

Personal finance management helps you grow and increase your asset base quickly. While it is wise to start somewhere when investing, it’s better to grow assets under your name. It helps in the future to secure more extensive credit facilities without bothering guarantors.

Financial consultants help you understand the difference between liabilities and assets and guide you in prioritizing each. You don’t want to invest in long-term liabilities, as they will lead you into future financial constraints.
With financial management skills, you understand that every coin counts; thus, you appreciate even the smallest side hustles that add to your income. Now, let’s look at the essential areas of your finances that require more attention.

📌 5 Important Areas of Personal Finance

There are several parts of personal finances management, but we shall categorize them into five primary areas: income, saving, investing, spending and financial protection. Let’s discuss each of them.

1. Income

Every coin that adds to your monthly earnings regardless of its source is called an income—it forms the basis of your financial planning.
This money can include salary, earnings from rentals, investments, passive side hustles, pension or bonuses. While all these streams add to your earning account, it’s easy to manage them by redirecting them to investment, saving or spending funds.

2. Spending

All the money spent on consumables and facilitation of investments is in the spending category. How well you control your spending determines how much money you will save and invest.

Taking control of your spending means you only pay for necessary bills like rent, mortgage, food, taxes, travel and credit card payment. The best way to avoid overspending is to have a budget when consolidating your income.
Controlling your spending habits leads to increased savings, contributing to future growth.

3. Savings

Saving is referred to as emergency funds since they are not stuck in investments and are not allocated for spending. The money can be kept in cash, deposited in bank saving accounts or checked in a bank account that you can access easily.

When budgeting, the rule of thumb is to save three times your spending money—meaning that you keep spending at a minimum. However, according to personal finance experts, saving is not for everyone. To learn more, Dave Ramsey’s baby steps do’s and don’ts explain the steps you should take in more depth.

4. Investing

Investing is the long-term allocation of your money to assets that generate profit over time. It varies from real estate, stock shares, bonds and market funds, which guarantee long-term cash back. The invested capital is inaccessible compared to saving.

However, it comes with its share of risk, thus requiring due diligence before committing your hard-earned income. While investment is the trickiest part of financial management, you’ll need to contact a financial consultant to guide you instead of making unnecessary mistakes.

5. Financial Protection

When investing your hard-earned cash, you need protection in case of often-unseen calamities. Different financial products protect you from financial risks/insecurity. They include life, health, term, and mortgage protection insurance.

Like any other form of investment, you need a financial expert to guide you on the benefits of each protection cover you need to take against your finances.
Financial protection is essential and requires guidance to avoid errors when signing the dotted lines.

📌 Final Thoughts

Personal Finance skills are for everyone planning a great future for themselves and their families. While it might sound complicated when starting, with time, when you adopt the habit, it becomes part of your philosophy.

Consulting a financial expert to expound on the 5 key financial aspects and walk with you throughout the journey makes it easy—because they will guide you on what, how and when to spend. They also advise on the possible risks related to the type of investment you want.