Understanding Personal Finance
Personal finance is basically the financial planning that a family or an individual performs on a regular basis, to plan, save, and invest money over the long term, based on various economic risks and future life expectations. In personal finance, you would, first of all, determine your own goals for financing your life, whether it’s for living a comfortable and secure retirement or starting a new business, or simply saving money for the future. You would then find appropriate investments and financial tools that can help you reach those goals. This way, you are making use of the most important financial tool – money!
Other elements of personal finance include asset allocation, estate planning, retirement plans, investing in your children’s education, and setting aside tax-deferred funds for retirement or the future. The most important asset allocation strategy is one that combines your current assets with those of your loved ones – as well as those of other financially capable people who are also part of your family. This helps you meet major life goals by spreading your risk and giving your family a greater say in where your money goes. Your long-term savings strategy should include an investment in a qualified retirement plan. A Roth IRA is a good example of a qualified retirement plan.
When it comes to estate planning, the most obvious is to buy a house, as this will provide immediate savings with compound interest. Another idea is to invest in mutual funds or to create separate funds of your own, like a Money Market or CDs. Both of these can be excellent choices when it comes to building nest eggs for retirement. If you own a house, you should also build equity in it. You can borrow money against the equity to make home improvements or to pay off debts and other financial obligations, like student loans and credit card debt. However, all these avenues of borrowing funds should be part of a comprehensive personal finance strategy.
Your financial goals must also be realistic and specific. How much can you afford to spend on things like insurance premiums? Will those new car expenses really help your bottom line? Are there other, more important, areas of your life that you need help with? If so, your strategy should involve using discretionary funds to meet these goals and desires.
When it comes to your own investing and financial affairs, your personal financial planning strategy should take care of day-to-day expenses. Look at your expenses carefully, and determine which expenses can be replaced, cut back, or completely eliminated. It’s very tempting to use credit cards for routine expenses, but this habit can lead to excessive debt that will be nearly impossible to repay. Instead, focus on liquidating small amounts of liquid cash every month. Your goal, as with any sound personal finance plan, is to gradually eliminate your expenses, so you’ll have extra money each month to put towards savings or other goals.
When it comes to retirement, the next step in your personal financial planning should be a thorough examination of your spending habits. Begin by reviewing all your bills, as well as your recent tax returns. Reviewing all expenses and incomes will let you see where your spending can be improved. For example, if you find that you’re wasting money on entertainment you may want to reduce your entertainment expenses or think about whether you’re eating out too often. By making changes in your personal financial planning, you will be taking steps toward ensuring that you have enough money each month to reach your retirement goals.
The same goes for your credit cards. If you have several credit cards, eliminating the ones you don’t use and setting up new credit cards for things like roadside assistance and groceries may be all it takes to increase your savings. You can also save money by paying off high-interest credit cards by consolidating your debt. In fact, consolidating debt can actually lower your monthly bills. If you are concerned about increasing your debt load, consider paying high-interest rates on small personal loans instead of credit cards.
Finally, do not forget about your future financial position. As you work towards meeting your personal finance goals, consider how your current funds will look when you are no longer working and when you are retired. If you have a comfortable lifestyle now and anticipate staying that way for a long time, it may be worthwhile to save a little extra each month so that you have a nest egg for your golden years. If you anticipate facing a difficult retirement age and anticipate having to make major changes in both your lifestyle and your budgeting, then it may be worthwhile to put aside little extra funds each month to ensure that you can meet your current expenses and your long term financial goals.