Managing Your Personal Finances

"Do not save what is left after spending; instead spend what is left after saving" - Warren Buffet (Investor and Business Mogul, CEO of Berkshire Hathaway)

Managing money is important for many reasons. It can help one increase and grow their wealth, lead a comfortable future, stay prepared for emergencies and more. However, with the digitalization of banking and financial services, technological advancements of smart devices and the easy availability of apps that deliver products at home, one may tend to spend impulsively. Over time, such habits may cause financial strain, leading to debts. To avoid facing such circumstances, it is necessary to manage your personal finances.

What Is Personal Finance?

Personal finance refers to managing your money as per your goals and requirements. It includes retirement planning, budgeting, managing savings and spending, investment planning, insurance, tax planning, legacy planning and more. It is also ideal to get a thorough understanding of your financial situation, so you can determine what life and wealth goals you want to achieve. Personal finance can help you meet those goals.

Areas of Personal Finance

To start managing your personal finance, it is necessary to focus on key financial areas that can determine how you spend and save. These key areas are briefly explained below:

Income

Income represents wages and salary that individuals receive for providing their services to an individual or organization. Individuals can use the income to support themselves and their family. The income one has can be used on daily expenditures, investments or be kept as savings, depending on a person’s life and wealth goals. Some of the common sources through which a person can earn income are - salary, pension, bonus, dividends, etc.

Expenditure

To plan your finances, you will need to allocate your income to the different types of expenditures based on your lifestyle. Some of the key expenditures include rent, loans, food, taxes, travel, bills, shopping etc. It may be necessary to manage these expenses and ensure that they do not exceed your income each month. Healthy spending habits can play an instrumental role in creating a sound personal finance plan.

Savings

Savings refer to the funds that one puts aside for future use. With the surplus from your income, you can choose to save the remaining amount. For savings, you can consider products such as savings and checking accounts.

Investment

You can also choose to invest the surplus from your income. Investment means purchasing financial products with the potential of earning an income or profit. Even though investments can generate potential high returns, they can be risky too. That is why it is imperative to identify the risk and the volatility of the financial products before investing in them. Some of the investment options include stocks, bonds, mutual funds, commodities, and art. Apart from these, to be better prepared for any unforeseen events, you can also consider insurance products such as life insurance and term insurance.

Planning

A sound financial management plan should include all the considerations mentioned above. If you are not too sure about how to manage them, you can speak to financial advisors and wealth management specialists who can guide you on your personal finance. They can also assist you to create a diversified and well-balanced investment portfolio.

How to Manage Personal Finances?

There are several ways through which you can manage your personal finance. Some of them are explained below:

Understanding the Current Financial Situation

One of the crucial steps that you may want to undertake before creating your personal financial plan is to assess your financial situation. It is imperative to know how much you earn, your expenses and the amount that you are left with after incurring all the expenses. You can then decide whether you would like to save or invest.

Setting a Financial Goal with a Plan of Action to Reach That Goal

Once you assess your current financial situation, you can create your financial goals. You can start by creating long-term and short-term goals along with a plan of action for when you want to accomplish them.

Creating and Sticking to a Budget

Reaching the financial goals that you have set in your plan will be challenging unless you create a budget and ensure you stick to it. By creating a budget, you can keep your finances organized as well.

Regular Progress Check

Once you start executing your plan, you must also keep track of it and reassess it from time to time when required. As situations and circumstances can change unexpectedly, you must also check and reassess your plan according to the circumstances.

Establish an Emergency Fund

Some investment products may lock in your money for a certain duration, while some may not generate the anticipated returns. Hence, it is necessary to have a savings account or a checking account to save a portion of your funds. You can always access your funds from these accounts whenever an emergency strikes.

Frequently Asked Questions

Why is it important to manage your personal finances?

Managing your personal finance is important to understand your financial situation and to know where you are spending your money. By managing your personal finances, you can enhance your savings and achieve your financial and life goals.

What are the areas of personal finance?

There are several areas of personal finance that you may want to look into before creating a personal finance. Some of these areas are as follows

• Income
• Expenses
• Savings
• Investment
• Tax Planning
• Retirement Planning
• Insurance

How to keep track of personal finances?

There are several ways through which you can keep a track of your finances. Some of the ways are mentioned below:

• Know where you are spending
• Create a budget
• Create an emergency fund
• Keep track of your account statements
• Use a budget-tracking app