personal financial management

personal financial management

The Importance of Personal Financial Management

1. Introduction to Personal Financial Management

When you refer to the art of financial management, it involves complete control over the finance of a family, person, group, or an organized body. In the modern era, the financial process has become quite complex with various risks associated with it. Moreover, due to the recent fluctuations in the global financial market, various issues have cropped up. However, this can be to the advantage of those who are willing to adopt them, and those who are cautious. Despite the many aspects of financial management, the above objectives can be easily achieved by adhering to three mandatory inward steps.

The management of personal finance is perhaps the mainstay of an individual’s efficiency in the world today. Because so much of our everyday lives depend upon the careful use of money we have earned or saved, it is important to gain some sort of systematic insight into how finance works and how decentralized management of finance can help us in utilizing our resources. However, despite the streamlined processes and simplicity of financial management, the majority of people are unaware of just how crucial personal financial management is.

2. Key Principles of Personal Financial Management

Some other financial management principles frequently referred to include: setting aside an emergency fund in a savings vehicle that provides liquidity and offers no penalties if withdrawn, taking a disciplined approach to achieving financial goals, setting financial goals and prioritizing them, saving for the long term, helping dollars grow by putting idle dollars to work by investing, protection planning, and giving.

Key principles of personal money management that are generally widely accepted in our society: (1) Live within your income. Don’t spend more money than you receive. (2) Anticipate monthly, seasonal, and annual expenses. These would include rent, insurance, taxes, and clothing. A definite amount of money should be budgeted for these expenses. (3) Save and invest at least 5-10 percent of your income (which should depend on the amount of income and the existing debt. For example, if you have a heavy debt, you should save less money). It is important to spend part of the money you make, but it is just as important to put some of the money away for later use. (4) Spend your money on items that will last, and not for things that will be used for only a short time. This is especially true of clothing; it is usually better to buy good quality, rather than inexpensive items that will not last very long. Substitute less expensive items for more expensive items. (5) Evaluate purchases in terms of long-range goals and values. The satisfaction of owning high prestige items may seem to be worth the price. Satisfaction is short-lived, however, wherever financial problems develop.

3. Tools and Strategies for Effective Financial Planning

To effectively pursue short-, intermediate-, and long-term financial goals, careful planning and ongoing management of financial resources are needed. Personal financial planning is the process of developing and implementing comprehensive plans to aid individuals and their families in effectively managing their financial resources to achieve their objectives. The importance of effectively managing personal financial resources may be better appreciated by understanding what went wrong with the management of numerous personal financial resources in the past. The areas of personal finance continued poor financial management are diverse and include the lack of savings, bankruptcy, tax problems, and poor investment choices.

The second task is to develop and implement effective personal financial management strategies that will achieve the goals. Strategies might include the use of a spending budget, appropriate insurance, credit cards, use of stocks, bonds, and mutual funds, use of financial planners, or other strategies for achieving financial health.

Determining the appropriate financial goals for an individual or household is the first step in effective financial planning. This step can be further broken down into short-term, medium-term, and long-term financial goals. Some short-term goals for people might be to pay off their credit card and add to their child’s college fund; another individual may have a goal of paying off their student loans or saving for a down payment on a house.

4. Common Pitfalls to Avoid in Personal Finance

4. Not keeping expenses and debts in check. Another key element in personal financial management is to have a spending plan in place. This would help you manage your spending in a better manner. Ensure that your income is more than your expenses. If you are spending more than what you can afford, then you can end up in a mess. You also need to take care of your debts/loans. Look at ways of getting them reduced, whether it’s through paying more than the minimum amount or if you are allowed by the people you owe money to, then you should refinance it at a lower interest rate.

3. Not having adequate insurance. One of the basic requirements of a sound financial plan is to have personal insurance. Often, it’s easier to overlook ‘small’ risks, but unforeseen accidents or illnesses happening to you might leave you in a terrible financial state. An inadequate medical or disability insurance would likely wipe you and your family financially. In most cases, if you have dependents, you’ll need life insurance. As with all the other strategies, it is important to get the right amount to cover the debt and also to not overpay for getting more than what you need.

2. Not having an emergency fund. This is one of the most important things to have in place. As I have mentioned earlier, unexpected expenses happen to the best of us, and when they do, it’s the people with the emergency fund that come out on top and avoid debt. Whether it’s a small amount that you begin with first, it is important to have some funds linked to a money market. At least keep 5-6 months’ worth of living expenses aside in case of a job layoff.

1. No financial plan. One of the most common pitfalls to personal finance is not having a plan in place. Whether you are trying to pay off your debts, save for your retirement or the education of your children, if you don’t have a strategy, it makes it difficult to make the best decisions for your future. An important note to make at this point is that the only cure for procrastination is action.