According to Forbes, having basic personal financial skills is one of the most important things that you can do to live a healthy and happy life. The height at which you understand the basic fundamentals of finance will impact your life greatly. In fact, it is the difference between prosperity and poverty. This article covers all you need to know about personal finance and all that relates to the subject.
What is personal finance?
Personal finance is a process that involves the way you plan and manages your financial activities. This includes your savings, spending, income generation, etc. The process by which an individual manages his or her personal finances is usually summarized in a financial plan or a budget. In addition, whenever an individual is looking to plan his or her personal finances, it is important to first consider the appropriateness of his or her need for banking products.
Learn more about other types of finance
What are the 5 areas of personal finances?
The areas of personal finances are 5. They include savings, Investing, protection, spending, and income.
Income:
This is a source of cash inflow that is used to cater for several expenses or for investment purposes. This could include bonuses, salaries, pensions, dividends, or hourly wages. It is the first step in any individual’s financial roadmap.
Savings:
This refers to the leftover or excess of what you spend and your income. You can decide to retain this for future expenses or for investment purposes. We cannot overstate the importance of savings. This is because an urgent or emergency need can present itself at any time, and when this happens your savings is the go-to source.
Investment:
The majority of people consider investment and savings to be synonymous. The point is they are different. Savings as we have earlier stated are excesses from your income after all expenses. While investment involves purchasing assets such as mutual funds, real estate, stocks, bonds, etc. with your money with the expectation to generate a rate of return. Investment comes with a lot of risks. This is because not all assets actually end up yielding ROI.
Protection:
This is a wide array of products that you can use to guide against unforeseen or unexpected occurrences. Under this category is the insurance policy. Common insurance products include Health Insurance, Life Insurance.
Personal Finance Strategies?
Having financial goals is very important to provide you and your family with financial freedom and security. The earlier you start having a financial plan, the better. Here are a few tips on personal finance strategies.
Devise a Budget:
This involves living within your income and saving enough towards achieving your long-term goals and plans. The common strategy is the 50/30/20 rule. This states that 50% of your income should be channelled towards living essentials, such as food and transportation. 30% to your lifestyle expenses and 20% towards savings for emergencies.
Set money aside for unexpected expenses:
Setting aside funds for emergencies and unexpected events is very important. The most ideal safety net is saving within three to six months’ worth of living expenses. This will help ensure that you cater for any emergency. Financial experts suggest that you should save 20% of your income towards emergencies.
Reduce debt:
According to a rule of thumb, don’t spend more than you earn. The instant this starts happening, debt is imminent. Although going into debt can be very helpful. But this is when you borrow to secure an asset with the expectation of a return.
Read more here to learn how to stay out of debt
Conclusion:
One of the major reasons many people cannot secure themselves financially is because of ignorance. Ignorance about what they should do and what they shouldn’t. Although, most times this might not be enough. But it is important that you understand the key components that you need to focus on when creating a road map for your personal finances.