The Ultimate Guide to Personal Finance

by Neuer Capital Team
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Personal finance refers to the process of planning and managing your finance activities, such as income generation, savings and spending, protection and investment. People who don’t pay attention to managing their finances often end up in a lot of debt and other financial problems. You certainly don’t want to face this situation, but don’t know what needs to be done. Most people just make up their mind to save more and spend loss, but such goals don’t usually give any results because they are rather vague. If you truly want to achieve your financial goals, you have to have an actual game plan.

Budgeting

Your personal finance management will begin with budgeting. It is one of the true key elements that you need for maintaining healthy finances. With a successful and efficient budget, you will be able to save and spend your money without taking on an unhealthy and unnecessary amount of debt. However, you should also understand that budgeting is a rather fine art. It requires flexibility, commitment and pragmatism. There are three vital facets of budgeting. First and foremost, you need to learn to create a flexible and realistic budget. Secondly, you have to commit to the budget you have made. Lastly, you need to evaluate your budget and its efficacy on a regular basis and make adjustments where required.

Step 1: Creating a realistic budget

  • If you want to create a realistic budget, the first thing you need to do is define your goals clearly. The important thing is to keep them as concise as possible. For instance, if you want to be a homeowner, you should be clear about the type of home you wish to buy, the amount of money you wish to spend and when you want to make your purchase. If you don’t have precise numbers, it would be immensely difficult to create or stick to a budget.
  • For ensuring your budget is as realistic as possible, you have to identify your primary source of income. This is quite straightforward who have just one basic salary. However, when you have multiple sources of income, such as investment income or real estate income, along with salary, things can get a bit complicated. No matter how difficult it may be, you have to nail down a realistic yearly and monthly income as accurately as possible.
  • In order to figure out where your money is going, you have to pay very close attention to where you are spending your money. If you believe that you are hemorrhaging money, but you cannot figure out the reason, then it is essential for you to perform a comprehensive analysis of your finances. One of the best ways to go about this is to collect receipts of every purchase you are making and evaluate them on a weekly basis. You will be surprised to discover how much you are spending on weekly items. After you have figured out where you are spending your money, you can decide where you want your money to go.
  • You need to create budgets for long-term as well as short-term goals. The long-term goals will come in handy for gaining control of your finances while short-term goals are useful for ensuring you remain financially flexible. Life is unpredictable and you never know when extra expenses may incur. If you end up deviating from your short-term goals, you can ensure that you have some flexibility and can still stay on track for achieving your long-term ones.

Step 2: Stick to the budget

After you have made the effort of creating a realistic budget, now your goal should be to stick to it. You shouldn’t deviate from the budget you have established, unless it is absolutely necessary. Some of the situations where you can deviate from your budget include emergencies, hospital bills or necessary car repairs. Flash sales are not an appropriate excuse for spending your money. If you have the habit of impulse buying, you may want to think about allocating some space in the budget for such purchases.

Step 3: Reevaluate your budget regularly

No matter what plan you are making, it is essential to evaluate it on a regular basis. More often than not, you will discover that there are several ways you can improve your budget while still including all your expenses. When it comes to personal finance, there is always room for improvement.

Have you decided that you don’t want to live from paycheck to paycheck? Do you want to say goodbye to debt? Are you ready to master your finances? This ultimate guide to personal finance is what you need as it will walk you through all the major components. From savings to budget to investments, Neuer Capital will help you get a good grasp on how to manage your personal finances.

Saving

When you are done with budgeting, the next important step is to think about saving. There is no ideal answer as to the amount of money that you should save in a year. Some specialists recommend that it is best to save 10% of your monthly earnings whereas other experts indicate that saving 20% to 30% would be better. It is a good idea to set a fixed amount of money that you would like to save every month. If you are new to the concept of saving, a good rule of thumb is to save as much as possible in order to develop good saving habits.

Step 1: Define short-term, mid and long-term goals for saving

You have to establish concrete goals for all kinds of financial considerations. The set of goals for saving are different as opposed to budgeting. You have to set short-term, mid-term and long-term goals. A short-term goal may include articles of clothing or a phone. Mid-term goals are usually for luxury items that you want to purchase in the near future, such as expensive electronics, vacations or new furniture. As far as long-term saving goals are concerned, it could be accumulating a huge sum of money that can be achieved with investments or compounded interest. These goals can include children’s education funds or retirement funds.

Step 2: Select a type of savings account

  • Regular savings account: This is a basic savings account that can be found at most banks. They typically don’t need a minimum deposit or any fees. However, they also offer little return. This is a good option when you want to save for a short-term goal or you want to put some money away for emergency, which can be easily accessed.
  • Certificate of deposit: When you want to save for a mid-term or long-term goal, a Certificate of Deposit or CD is a good option. This is another product offered by credit unions and banks. Using them is incredibly easy and they carry little risk. But, to access this account before time, a penalty has to be paid. It can keep your money safe for a couple of years. You can find different types of CDs. Here are three common options to explore:
  • A traditional CD is the most common and it includes an account offering a fixed interest rate for a specific time period. When the time is over, you can move the amount to a different account or withdraw it.
  • A callable CD is next, which can offer higher interest rates and it has this name because the bank can call it after a specific period of time. That’s when they return your deposit, along with interest. They are preferred by banks because it gives the opportunity to back out of high interest accounts when interest rates go down.
  • A global CD is one that’s connected to global currency rates. This is an excellent option, depending on the world economy’s stability. However, if you are thinking of a CD when the European currency could collapse, it wouldn’t be a good move.
  • Money market account: This is a savings option that can give you a higher interest rate as compared to traditional savings accounts. Your access to the money is limited and a higher starting balance is needed, but it can be set up at most banks.
  • Online savings account: This is a great option for people who are familiar with online banking. Online banks don’t have to pay the same overhead costs as traditional banks, they can offer higher interest rates.

Step 3: Understand that interest matters

Interest refers to a fee that’s assessed when borrowing money. Interest can be paid or earned. When it comes to savings accounts, the banks are borrowing your money for making investments and so they are entitled to give you interest. The magic key that’s needed for making a savings account work is compound interest. It is vital for getting a good rate and to continue adding savings to the account over time for taking advantage of the interest. It is better to find a rate that’s compounded frequently. For instance, if interest rate is compounded weekly rather than annually, you would certainly make more.
However, it should be noted that a maintenance fee is required by high interest accounts. Therefore, it is crucial to ensure that you have enough savings and are earning enough interest for covering the maintenance costs in order to make a profit.

Investing

Since the market crash of 2008, investments have become a rather uncomfortable topic for people. After the crash came the Hollywood blockbusters about the 1980s Wall Street, which made investing feel more out of reach than ever before. Even though investments are not a very simple concept, they are not as complicated as they appear. In fact, investments can play an important role in building your investments portfolio. It is possible to make safe investments that give reasonable returns. You could go for riskier investments if you want to strike gold. There are different types of investments that can be made and the amount of risk you want to take depends on you. Some options include:

  • Bonds: These are a kind of loan. Buying a bond means that you are essentially loaning money to a government, bank or company. In return, the borrower will repay the principle amount, along with interest payments. This is a safe investment vehicle and you can find a variety of bonds in the market. Lots of them are government bonds issued by the treasury or federal government. The duration of the bond describes how sensitive it is to fluctuating interest rates.
  • Stocks: Purchasing the stocks of a company means that you are buying partial ownership in the company. The purpose of doing so is to watch your investment go up as the share price of the company increases. Dividends, interest rates and capital growth are the primary reasons why people invest in stocks. Unless you have a huge amount of capital and plenty of experience in the market, you will require a stock broker for buying and selling your stocks. A commission will have to be paid to the broker. The rate will depend on the brokerage firm you use.
  • Mutual Funds: This is an account that combines the assets of several investors and then invests this money on their behalf. The investment is then managed by the company that issues the funds on behalf of the account holders. The aim of these funds is to help people in making investments without needing to make individual trades and purchases. With mutual funds, you can participate in the stock market even if you just have $1,000. However, there are some costs associated with them as well. As the account is managed, a fee has to be paid to the organization issuing your account. A 2% redemption fee may also have to be paid.

Conclusion

When you want to create a healthy relationship with money, it requires a lot of work, dedication and consistency. But, the most important thing is that you need a lot of flexibility. This flexibility applies to your financial goals as well as to the things you believe you need. Ultimately, when it comes to personal finance, it is necessary for you to be realistic about the amount of money you make and the amount of money you can spend.
As long as you remain flexible and realistic, it is possible to come up with a financial plan that will enable you to live your life to the fullest when you are working and do the same once you have retired. The key is to be smart and make your decisions wisely and you will have absolutely no problem in maintaining healthy finances, just as you wanted.

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