Personal finance pertains to managing, budgeting, saving, and investing money at an individual level or within the family unit. The process involves assessing your financial situation by monitoring your income statements and balance sheets. Then, you set your short-term and long-term goals, and create a plan to accomplish them.
Knowing how to manage your financial resources properly is a crucial life skill. It should be taught early to kids who already have basic knowledge in mathematics. Most essential is knowing how to save money so that it won’t be much of a chore when they become young professionals with their own income.
It’s good to keep on monitoring and reassessing your financial situation as you grow older. Here are some things you need to know about managing your personal finance:
- Practice Self-Control
A lot of people have the misconception that they should reward themselves during payday. While there’s nothing wrong with splurging on food or other luxuries that are within your budget sometimes, falling to the impulse buying pattern regularly is a problematic thing.
Giving in to temptation all the time can significantly harm your financial well-being, especially when you don’t even really need the item that’s on sale. You should delay these types of purchases for a day and think about whether that pair of shoes you’re eyeing will be useful and won’t just add to the clutter in your closet.
- Make Lifestyle Adjustments
Reduce frivolous spending by living contentedly. If you can’t afford a new house yet, you shouldn’t stretch your finances just to purchase one. According to Moneytaskforce.com, this type of thinking is prevalent in the younger generation because they believe it’s a good investment. However, one should also consider the depreciation in the property’s value, as well as other costs such as maintenance and repairs.
Also, you don’t have to live in a two-bedroom apartment just because you can. It’s better to accustom yourself to living simply in a pad rather than keeping up with the Joneses or the Kardashians.
These are a few other life changes that you can do to help you save money and become healthier at the same time:
- Bike or Walk to Work – If you’re fortunate enough to work near your place, invest in a bike or walk to the office. Not only will you save on maintaining a car or paying for an Uber, but you’ll also get your daily dose of exercise. If your office is far from your home, you can still save money by using public transit.
- Stop One Bad Habit at a Time – Tracking how much you spend each month can be eye-opening, but it’s also overwhelming when you think about where you should begin. Ditching vices such as smoking or drinking liquor can be an excellent place to start. For instance, if you spend 10 USD a day on cigarettes, you’ll end up saving 3,650 USD per year. Plus, you can allocate the amount for your savings to motivate you to kick the habit.
- Make Everything at Home – It can be tempting to order takeout after a hard day’s work. However, buying food frequently can quickly add up, and you end up wasting your money, which could have been used for your nest egg. It helps to make your lunch and dinner in batches so you always have meals that you can reheat when you don’t feel like turning on the stove, as well as washing pots and pans. Plus, home-cooked meals are way healthier than fast food.
- Create a Grocery List – When you decide to get cooking, you have to note down the ingredients that you’ll need. The list helps in lessening the time you spend in the grocery looking at products on the aisles, which reduces the risk that you end up buying more than what is in your budget.
- Review Your Employee Health Benefits – Reread your contract again and check if your company offers employee health benefits. This can come in the form of discounts on gym memberships, rewards for reaching fitness milestones, and free programs that will help you quit vices or lose weight.
- Know Your Net Worth and Track Debt
Your net worth refers to the combined value of your assets, both non-financial and monetary, minus all your liabilities. In theory, it’s the cash that you’ll end up with if you sold everything you had and paid off all your debts. While there’s no specific number that you should aim for, you must be able to track your progress yearly and see improvements over time.
This number is crucial because it allows you to view your current financial situation at a glance. There are three factors that you need to calculate first before arriving at your net worth:
Your assets include the value of your home, real estate properties, and vehicles. If you have a business, your company is also considered an asset.
You also need to collect the latest statements of other liquid assets, such as the funds in your checking and savings accounts, as well as other investments.
List your other valuable possessions like jewelry, heirlooms, and rare collections. Items worth 500 USD and above are considered assets.
Add the figures to get your total assets.
It’s also important that you track your debts because these are considered liabilities. The balance on your mortgage and car loans are examples of this financial aspect. List down their current balances.
Other types of liabilities at a personal finance level include credit card debts and student loans.
As with your assets, you need to add the balances of these debts to get your total liabilities.
- Net Worth
After doing the tedious task of calculating your total value and debts, you can simply subtract your liabilities from your assets.
You shouldn’t worry too much about the number that you end up with, whether it’s small or large or negative. Think of this figure as a reference point for your future assessments.
Do a yearly check on your financial situation by repeating the process of calculating your assets and liabilities to get your net worth. Comparing it with previous numbers can help you monitor your progress and validate that you’re doing things right.
- Stay Updated on Your Credit Score and Report
Your credit report is a comprehensive document that contains information on your past and current credit agreements. It gives lenders an idea of your total debt, the age of each account, and your consistency in making repayments.
Meanwhile, you can think of your credit score as a grade given to you based on the data in your credit report. It makes it more straightforward for lenders to evaluate the risk of allowing you to borrow their money. Typically, it’s a three-digit number that ranges from 300 to 850.
Three credit bureaus give you a credit score: Equifax, Experian, and TransUnion. When you ask for this financial score, you actually get three different numbers from these reporting agencies.
It’s crucial that you have a copy of your credit report and you know your credit scores. This way, you can assess your current financial situation and make remedies as well as adjustments on your lifestyle to improve your score.
- Set a Budget
Creating a budget can help you stay on top of your finances. You should note down your regular expenses each month, such as your utility costs, rent, insurance payment, and your daily allowance to get a snapshot of how much income you need to stay financially stable.
Plus, you should also prioritize setting money aside for your short- and long-term goals. Dedicate a portion of your salary for your travel funds, but don’t forget about your retirement nest egg as well.
- Know Different Saving Methods
Find the best money-saving ways for your financial situation. The same method won’t work for everybody, so you should educate yourself on the different techniques to find what’s best for you.
Here are some popular money-saving tactics that you can try out:
- Figure Out the Percentage – A well-liked way to save a portion of your salary is to divide it by percentage. The 50/30/20 budgeting rule of thumb splits up your income into three parts. You allot 50 percent for your monthly expenses for necessities like your rent, groceries, and utilities, among others. Meanwhile, you set aside the 30 percent for luxuries, such as shopping, eating out, and your hobbies. Lastly, you put 20 percent of your money into your savings.
- Set a Dollar Amount – For some, spelling out a specific amount is more helpful in keeping them on track with their financial goals. This is ideal for those on a tight budget because of its flexibility and customizability.
- Collect Loose Change – This technique is perhaps the slowest way to save, compared to the other methods. You just have to keep the change that’s left in your pocket after each day. It may take some time to buy that particular item you’re eyeing, but it’s a start.
- Join a Savings Challenge – You can find lots of savings challenges online. One of these is the 52-week money challenge where you pick a number among a list and attempt to save the specified amount for that particular week until you complete an entire year’s worth of savings.
Managing your personal finance doesn’t need to be an extravagant affair. You just need to have the right mindset and live within your means. You also have to determine your net worth, credit score, and credit report so that you have a holistic idea of your current financial situation.
Lastly, set a budget and stick to it. Educate yourself on the different money-saving methods and find the right one that works for you.