What is personal finance?
Money doesn’t buy happiness, but bad money management will bring you misfortune . Lack of money is the main reason why many people do not achieve their goals in life. But how can you work five days per week and at the end of the month, not only you don’t have a lot left but you don’t know where your money is gone. And you start wondering if you can have that car, house or vacation you have been dreaming off.
I’ve been through such situation and decided to gain control over my money. I decided to know the difference between people who achieve their financial goals and those who don’t. The difference is quite simple : they have a realistic financial plan. Personal finance is simply the way you manage your money.
What is a realistic financial plan?
Financial planning is made according to your goals. So it is different for every person and evolves as your goals expand. Whether you are starting out in financial planning or already on that path, your first goals should be to create a practical budget that suit your actual financial state, improve or keep a good credit rating, build an emergency fund and owning a retirement account.
A practical budget
A good rule of thumb say that 50% of your take home pay should be allocated to regular monthly expenses such as housing, food, utilities bills and transportation. Set aside 30% for occasional expenses like clothing, repairs, books and fun. And use the remaining for investment or retirement.
These percentages are not set in stone. You can adjust it to match your goals. The most important thing you have to remember when setting a budget is that you should not spend your money in stuff you don’t need and keep some savings for future use. Always spend less than you earn.
Keeping a good credit score
Your credit score is your financial history. Lenders will based on your credit score to decide whether or not you should get a loan or mortgage and what interest you will have to pay. I’m sure you’ve already realized that a bad credit score will slow you down in realizing your goals. But don’t startle, a bad credit score can be ameliorated. You just have to make your credit payment on time every month, including loans, utilities, and mortgage payments. And don’t exceed the limits on your credit card accounts.
A good credit is 700 and above. From 800 and above, your score is considered excellent. So I think everybody should try to get as close as possible of those numbers. After all, you will be paying less interest on loans.
Building an emergency fund
An emergency fund is a cushion for unexpected events such as a job layoff, sickness, or repairs. Ideally, an emergency fund includes at least two and as much as six months of your monthly paycheck.
It is one of your important saving because it will be your first asset of cash in an emergency. If you happen to use it, make sure to replace it as soon as possible.
A retirement account
You don’t want to be sixty years old, working hard for money. So in order to have a joyful and peaceful retirement you have to start when you are young. It should be your first investment account.
Instead of hoping to have enough money when you retire, it’s important to determine how much you think you’ll need and save for it. You may participate in a retirement savings plan at work or may have a personal savings plan like a traditional IRA or a Roth IRA. Each plan comes with its unique features but the most important is to start and learn on the way.
Benefits of a good financial planning
- You will keep more of your hard earned money.
- You will improve and keep a good credit rating.
- You will be able to provide for yourself (and your family) financial security.
- If you are able to fund your retirement account continuously until you retire, you won’t have to hassle for money. You still need to be careful with your spending but your life will be better than the one’s who didn’t planned his retirement.
What to keep in mind when starting out?
- You have to know that financial planning is not only for today. It is for your entire life.
- You will have to learn self discipline. It will keep you from overspending or spend money when you don’t have to.
- You have to know that when starting out, your first budget won’t be perfect and because we can’t predict everything, keep in mind that your budget is a guideline that can be adjusted sometimes.
- You have to learn also when to break the rules. Ask yourself when you plan on buying something that wasn’t planned: What value does that bring in my life? Is it worth that money?
I think everybody should know about personal finance. By increasing your knowledge in this area, you will build an effective and realistic budget, make wise decision about spending and savings. You can also think about investment in addition to your retirement account to help you build a financially secure future for you and your family in order to have a smooth transition from professional life to retirement.
PS: Thank you guys for reading me. There’s something I want to know. Where are you in your financial planning? Put it in the content below.
I already have a budget, not the best but it allows me to put some money away in an emergency fund and an IRA account.