Personal financial management entails investing and managing your money. It includes budgeting, banking, insurance, mortgages, investments, retirement, tax and estate planning.

It refers to the entire industry that provides financial services to individuals and gives advice about financial and investment opportunities.

Importance of personal finance

Personal financial management is more about meeting your personal financial goals. Your goals could be either having enough for your short term needs, planning for your retirement or savings for your child’s education. It all depends on your income, your spending, your savings, your investing and your personal protection.

Income

Income is the starting point of personal finance. That is the entire amount of cash inflow you receive and you can allocate it to your expenses, your savings, your investments and for your protection. It generally refers to all the money you bring in. This may include; salaries and wages, dividends and other sources of cash inflows.

Spending

Spending refers to the cash outflow; this is where most of your income goes. It is what a you uses your income on or to buy. That includes rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel and entertainment including others.

It’s a critical aspect of personal financial management for an individual to be able to manage their spending. You must ensure that your expenses (spending) is less than your income. Otherwise, you might not have enough money to cover your expenses and will end up falling into debts. Debts can be draining financially specifically due to the high interest rates.

Savings

Beyond that, cash idling in a savings account becomes wasteful since it loses its purchasing power to inflation over time. Hence cash not tied to an emergency fund or spending account should be placed in an investment. That’s something that will help it maintain its value or grow.

Investing

Investing involves the purchasing of assets, these are usually stocks and bonds, to earn a return on the money invested. This majorly aims to increase an individual’s wealth beyond the amount they invested. Thou there are some risks that come with investing since not all assets value appreciate.

Since investing can be difficult for people who are unfamiliar with it. Its advisable to dedicate some time to gain an understanding through studying. It might also benefit you as an individual to hire a professional. The professional will help you invest your money if you don’t have time to familiarize yourself with it.

personal Protection

This refers to the methods that people use to protect themselves from the un expected events. This events may include accidents and illnesses and also to preserve wealth. Personal protection includes life and health insurance and estate and retirement planning.

Setting financial Goals

It’s advisable to start financial planning as early as possible. But its never too late to set financial goals to give you and your family financial security and freedom.

You should know your income

Before deciding anything, you should ensure that you know how much in total you bring home after taxes and withholdings.

Pay yourself first

It’s important to pay yourself first. This is by ensuring that some money is set aside for unexpected expenses. This expenses include medical bills, a significant car repair, day to day expenses and in case you get laid off.

Financial experts highly recommended that you put away 20% of each pay check every month. In case you fill up your emergency fund, you shouldn’t stop saving. You should continue funneling the monthly 20% towards other financial goals such as retirement funds or a home down payment.

Limit and reduce debt

You should not spend more than what you earn, this will keep debt from getting out of hand. But most people borrow from time to time. Sometimes it can be advantageous to go into debt, for instance if it leads to acquiring an asset. For instance, taking up a mortgage to buy a house. Regardless, leasing sometimes can be more economical than buying outright.

On other hand, minimizing repayments to interest only can free up income to invest elsewhere or put into retirement savings.

Buy Insurance

As you get old, its natural for you to accumulate many of the same things that your parents did. For instance, a family, a home or apartment, belonging and health issues. Its advisable to acquire an insurance as early as possible since it gets more expensive the longer you wait. Medical and life insurance increases in cost the older you get.

Insurance covers most of the hospital bills as you age. This leaves your hand earned money or savings in your family’s hands. Medical expenses are one of the main reasons for debt. Incase of death of a breadwinner, life insurance can give those who are left behind a buffer zone. This helps them to deal with the loss and get back on their feet financially.