What does personal finance mean to you? Very few people understand what actually personal finance means. Here we explain everything you need to know to manage your money well.
So, what is personal finance?
Personal finance is a broad term that covers managing your money, including investing and saving. Everything about retirement planning, insurance, budgeting, investments, banking and mortgages all fall under personal finance.
The primary focus of personal finance is making sure you are in a position to address both short-term financial needs as well as long-term financial needs comfortably. Long-term goals include your retirement planning and saving for your children education. Your financial literacy is a big plus when it comes to personal finance as that knowledge helps you to live within your financial constraints.
What are some personal finance strategies you can do today?
It is never too late to create a financial goal and focus on it. So if you don’t have one, feel free to create and the earlier, the better. That being said, let’s go through some of the basics about personal finance.
Come up with a budget
It is prudent to devise a budget if you truly want to live within your means. The 50/30/20 method can guide you on how to spend every dollar you earn. Here is how this method works:
- 50% of your income after taxes goes toward living essentials such as food, rent, and transport.
- 30% goes toward lifestyle expenses such as clothing and dining out.
- 20% is allocated to retirement, saving, paying and any other future plan.
Once you have a budget, it will be easier for you to know where you can possibly trim. For example, if spending much on unnecessary subscriptions, you can do away with some. This way, you will have enough money to fulfil both short– and long-term goals.
Create an emergency fund
You can have an emergency any time of the day, and it is good to make sure you have enough money to address any uncertainty that comes your way. So, make sure to allocate some cash for unexpected expenses. Financial experts recommend setting aside 20% of your paycheck every month. Once you have enough emergency fund, continue finding other goals.
Only borrow when it is necessary. Avoid this habit of borrowing from time to time as that will hurt both your short– and long-term goals. You can avoid borrowing money now by spending less than the amount of money you bring in each month.
Use credit cards wisely
Make sure to manage your credit card astutely. That includes paying off balances on time and working to improve your credit rating. Your credit rating is very crucial and especially in future when securing a loan. So, make sure to safeguard it all the time. Missing to make payments and regularly paying them late are some of the things you may want to avoid as they will hurt your credit score.
Monitor your credit score
As mentioned above, your credit score is very crucial when you want to obtain any form of financing. Your credit score is directly linked to your spending, so you may want to make sure you have a good credit history as well as appealing credit to debt ratio. Here is how the credit score is calculated:
720 = good credit
650 = average credit
600 or less = poor credit
Paying bills on time is crucial to building a solid credit score. You can even set up a direct debiting if you often forget to make payments. The other alternative is subscribing to reporting agencies that provide regular credit updates. That way, you will know when your score is appealing and when it is not. You can obtain free credit reports from TransUnion, Experian and Equifax.
Consider your family
When you are gone, how will your family divide your assets? Will your family receive maximum benefits from the insurance company? Will the will you left be honoured? It is crucial to consider your family in every decision you make because if you don’t all you have left can go vanish in no time or land in the wrong hand. That is not something you want to happen after investing.
Talking to professional like will attorneys and financial advisors is very crucial when contemplating about your family. Equally, it is prudent to teach your children the value of money and how to spend so that even in your absence, they will spend the little or much they have wisely.
Pay off student loans
Devise a plan that will see you pay your student loan on time. Fortunately, there are various ways to repay student loans quickly. For example, you can pay off the principal faster to avoid high interest. Note that there some private and federal loans that are eligible for a rate reduction if you (the borrower) enrols in autopay. Here are some federal repayment programs you can consider:
- Extended repayment which stretches the loan out over a period that can be as long as 25 years.
- Graduated repayment which gradually raises the monthly payment over ten years
Plan and save for retirement
Don’t be like some people who think retirement is a lifetime away. Each day that passes your retirement gets closer, but are you ready for your retirement? Starting early to save for retirement is the only way to be sure you are ready. One easier way to save for retirement is by contributing to retirement accounts like 401(k) or IRA. Other things you can do to plan for retirement include converting a term life insurance policy to a permanent life one and waiting long enough to receive social security benefits.
Maximize tax break
Leveraging tax breaks gives you an opportunity to reduce past debts and focus on your future plans by maximizing tax savings. Starting annual saving receipts and tracking expenditure for all possible tax credits and tax deductions is equally significant. Tax credit cuts the amount of tax you owe, and a tax deduction reduces the amount of income you are taxed on.
Give yourself a break
Don’t focus too much on planning and budgeting and forget to reward yourself. You need to enjoy the fruit of your labour. For example, you can reward yourself by making a significant purchase, visiting places you love. Just do anything that will give you a break and is fulfilling at the same time.
You can as well delegate. Sometimes you don’t need to fully involved. Hire an expert, relax and wait for the results.
No one is sure of when uncertainties will knock. Are you sure when they will knock at your door? Of course not. It is, therefore, crucial to be prepared for the unexpected by getting yourself a good insurance cover. Make sure to understand you need well in order to get yourself a good cover.
Learning about personal finance
Very few schools will teach you how to manage your money, but that should not be an excuse for managing your finances poorly. The good news is that today you can learn online on all matter personal finance. The other alternatives include visiting a library and searching for book talking about personal finance and listening to podcasts. You can also browse through our expert finance blog to help you with your personal finance needs.