Table of Contents
What Is Personal Finance?
Before discussing the foundations in personal finance, first, a person should have an understanding of personal finance. The question arises what is personal finance?
Personal finance is an industry that renders household and financial services to individuals and provides financial advice and investment opportunities. Moreover, it covers a large sector in which various sorts of services are rendered, which banking, insurances, budgeting, investments, mortgages, taxes. In addition, it also helps in the management of investment and savings of your cash.
As the very word itself indicates that personal finance is all about managing your money when to invest when to save. And what measures you should take to overcome poor financial situations? It’s regarding utilizing your income to its full possible potential in such a manner so that you can make investments and savings. This process entirely depends on personals income, if it is luxurious or constrained. And what are the expenses incurred in both incomes, the desires and goals to be achieved? While all the mentioned acknowledge personal finance gives you a plan to fulfill these needs.
Even financial goals, education for children, pensions, and short-term financial needs are all rendered. For all of this to come to life, then the customer must be familiar with financial literacy or to put things this way. One must be or must obtain financial literacy, this investment of time in financial literacy will help him in ways and mainly help in making smart decisions and will be able to differentiate between good and bad advice in that specific scenario.
Suggested Read: Best Personal Finance Books
Foundations in Personal Finance
So, now after developing an understating regarding personal finance, it’s time to discuss foundations. What are foundations? Suppose a house is under construction, and after its completion, you decide to move in. Until you get the assurance from the experts that the foundation on which it is standing can hold the weight you won’t shift. For getting benefit from personal finance for the long term than be patient and strive to improve your financial situation. As the saying goes, “what comes easy won’t last long, and what lasts long won’t come easy.”
Solid Foundations
Possessing a steady financial future lacking a solid foundation is impossible. It is like completing graduation without passing mid-school sounds crazy, right! Without any basics and foundation, the same is the condition with finance.
Don’t worry if you don’t have a solid foundation because this is the reason you are here. You need to be patient and it will be fruitful.
Money Goals
Everyone has their money goals and subconsciously has a plan for what to do with the leftover money after meeting basic necessities. Some people tend to earn money without having any goal. But it is a waste of energy and time for the time being it is satisfying needs, but what is the use if it is not invested in means of auto-generating itself so that when you age and won’t be able to work at that time, you will rest, and those investments will earn for you. Have a direction in which you want to use up your money and improve your financial issues. Setting a direction will help you in achieving your goals step by step.
Budget Building
A crucial element in achieving financial goals is budget building; having a budget will always prevent you from spending carelessly. It is the same as procuring a Lamborghini without having the budget. The best to build a budget is by start saving a portion of your monthly income after taking out expenses. And make a saving plan if you have not made one it. You are a busy guy and don’t have enough time to note. And have a hard time keeping track of your budget, then tools like Mint and Personal capital can help you.
Clearance of Debt
Debts are a huge burden that always makes you feel pressured and snatches your free air gives the feeling of imprisonment. So it is better to get rid of them as soon as possible. You can opt from the two given choices which are the snowball method and avalanche method.
Snowball Method in Personal Finance
This is for people who like to take things slow, or you can say, one step at a time. What happens in this method is after all the expenses are incurred, and all the needs are satisfied. The remaining cash is utilized in the process of clearing the smallest debt you owe. After the clearance of debt, monthly payments are gathered. And similarly used to clear the next debt. You can say the process goes in ascending order. The good thing about this method, due to its approach, is it assures and motivates you that the debts are clearing one by one.
Avalanche Method in Personal Finance
This method uses an approach by paying off the debt having high interest rates. With the passage of time, high interest rates will cause you additional money as long as the debt is not paid or cleared. Yes, you may not pay extra payments for a long time if you have a high-balance loan. But as compared to the snowball method, the avalanche method is much more efficient and faster.
Emergency Fund Building
The practice is usually performed by the majority that they retain a portion out of their monthly income, which can be addressed as retained earnings. The purpose of retained earnings is that it is used in case an unexpected expense is incurred. A bill pops up, or if the person loses a source of revenue or income. In such scenarios, the survival will be completely based on those retained earnings. And won’t let the person drown and will keep floating.
An ideal amount recommended by the financial experts is about three to six months of expenses that can be bear without any difficulties. Once the emergency fund fills up, it is better to continue filling it up because of the uncertainty of the matters.
Avoid Unnecessary Expenses
Paying bills before the due date is a challenge because often, life keeps you tangled in other cases. A bill missed can cause a huge impact on your credit score because the idea is to avoid unnecessary expenses as much as possible. And to save the day, automated bill pay steps in.
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You don’t have to hustle all you have to do is create an account, go to your settings and set automated bill pay to avoid such slips. With automated bill pay on your side, you will never miss a bill, although one thing you have to account for is to cross-check the bills to ensure that you are not overcharged.
Retirement Plans
The reality is a lot of people think that there is a lot of time in growing old, but the bitter truth is years are passing with the blink of an eye, nowadays at the end of the year it seems like it began a few days ago with time passing rapidly, people should consider their retirement plans. A hefty amount of assets is required to have a peaceful life when you reach the verge of your life. The sooner you start saving for retirement, the better because experts suggest that people utilize approximately up to 80 percent of their salary in retirement, and honestly, the amount grows smaller and smaller with the passage of time.
Desires and Basic Commodities
There is a huge difference in commodities and desire (wants and needs); this may vary from person to person, but a very important factor that helps in determining the choices made are the suitable ones on a regular basis. Desires and needs are responsible for ruining the budget because they urge you to spend unnecessarily on new clothes, mobiles, traveling.
Basic commodities are the requirements without which survival is impossible such as food, water, shelter, etc. Yes, this may be a bit challenging for those who have families because they have to bear their expenses as well, and if there are children in the family, then it gets a bit tougher. In the end, if you can distinguish the commodities and needs, you will be able to follow your budget more easily.
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