Personal finances are hard to manage, and you get to know about that as soon as you start managing them. It is true to some extent that a lot of people are living lives that they had not desired because they did not manage their finances well. It does not matter which country you live in, when you don’t manage your finances well, you have to suffer in one way or another. As a US resident, you end up hurting your credit score and then living becomes difficult. The only way for you to stay on track and manage your finances well is by following some guidelines that have been accumulated from the experiences of the people.
This guide is your introduction to personal finance. It will go into the details of personal finances, the challenges you face while managing them, and the ways to overcome those challenges.
Understanding Personal Finances
The first and most important thing is for you to understand what personal finances are. The term includes a lot of things and you will have to wrap your head around all of them in order to get a good idea of personal finances and how you can manage them. Because it is an introduction to personal finance, we can’t go into the deep details of things. However, all that you read in this guide will be enough to give you a good idea of what your next step should be to manage your finances well. Here is what personal finances include.
Your Earnings and Expenses
Personal finances include all the earnings that you make in a month along with all the expenses. If you are doing a regular job during the day time and a small part time job during the night time, you will have to calculate the income from both these jobs within your personal finances. In addition to that, all the expenses that you make from this money will be considered a part of the personal finance as well. You have to know that your income is like an inlet of money into your life whereas your expenses are the outlet. Your job is to increase the pressure of the inlet and reduce the amount that’s passing through the outlet.
Do not skip any expense when you are calculating your finances. Keep in mind that the pack of cigarette you buy every other day is also a part of your personal finances. It is an ongoing process, and one that covers your entire life. So, when you calculate the expenses of things, you have to see their long-term effects. You will not see how much money you had to spend on the pack of cigarettes. You have to look at how much money you will end up spending on the pack of cigarettes after 30 years.
Your Investments, Profits, and Losses
All the investments you make, all the profits you make on those investments, and the losses you suffer are parts of your personal finances as well. Keep in mind that personal finance might not be a complete term. Finance management is the real term because when you talk about finances, you have to talk about their management as well. Your profits and losses are all about managing your money. In fact, the smallest amount that you dedicate to investing is also a part of your finance management. If you keep making profits, you will become financially free at one point. If you keep losing money, you will go bankrupt.
If you do not make investments, you might not have enough savings by the time you retire. Investment let you test your potential as a businessperson. If you take risks today, you will reap the benefits of your risky steps tomorrow.
Your Lenders, Brokers, Advisors
You must not forget that all the lenders that you are dealing with a part of the financial loop that you call personal finance. If you have borrowed money to buy a house, you must have gone to a lender for that money. If you want to invest your money in stocks, commodities, forex, and cryptocurrencies, you will have to go to a broker. If you can’t make heads or tails of your personal finances, you will take the help of a finance advisor to help you out of the miserable situation. The entire industry that consists of lenders, borrowers, advisors, etc. is also a part of your personal finances and their management.
Your Goals and Purpose
Last but not least, you cannot ignore the importance of your goals, aims, and vision when you talk about personal finances. They are, in fact, the most important part of any personal finance management endeavor. You cannot think about managing your finances unless you have some goals. If you are saving money, you must have the answer to “why.” If you want to save at least $1 million, you must call that a goal. If you want to save that money because you want to own a house and start your own business, you will call that motive or purpose.
If people did not have any motives, purposes, goals, and aims, they would not worry about personal finances at all. However, that’s not the case and you have to manage your personal finances because you have to meet your goals and pursue the purposes that you have set the goals for. These goals keep your life challenging and you moving to get your hands on to something at least.
Knowing the Challenges of Managing Personal Finances
The biggest challenge when you are trying to manage your personal finances is the limits that have been set. There are all sorts of limits that you have to face when you are trying to make your financial life come in order. For example, you want to save a lot of money but you can only save so much because of your monthly earnings and expenses. Since you have fixed expenses and your job is only that much productive, you can’t save as much as you want to save. There is a limit on how much you can earn because of the industry you are in.
When you are in a particular industry and within a particular profession, you are only going to get paid according to them. There is always a maximum and minimum salary associated with your industry and profession. So, when you think about managing your finances, you have to keep those limits in your mind.
Desires are like piranhas and your budget is the corpse of a dead fish in front of those piranhas. The more desires you have, the faster your budget disappears. You have to be very careful with that you desire for. In most cases, people are bad at managing their finances because they cannot control their desires. They keep on spending their money on things they really do not need. When they don’t do it for themselves, you will find them doing it for their loved ones. Perhaps, you don’t want to buy that new phone from Samsung, but you want to buy it for your son or your wife.
This desire is going to make you spend thousands of dollars. This same amount of money could go into your retirement savings account and become your support in the later days. Or you could invest that money in the financial markets and turn it into hundreds of thousands of dollars. The choice is really yours. Do you want to turn your $1000 into $100,000 or a smartphone that will not last you for more than a couple of years?
Unfortunately, you can’t always save money even if you are among the highest earners in your company or the industry. That happens when you are living a life that does not match with your earnings. You will find a lot of people in life who are facing this particular problem. They want to save money because they earn a lot of it but they can’t save because their lifestyle does not allow them to. This usually happens with individuals who were earning a lot of money at some point in their lives. However, some event afterward causes them to lose their job or business and start a new one.
This new one is paying them a lot of but not as much as the last one. However, since they have already become a part of the lifestyle that they had set with their previous salary, they can’t find a way to go back. You will be surprised to know that it is nearly impossible to go back to the life you were living before you started living your current life. In some cases, the biggest earner in the family dies and those left behind can’t earn enough. However, they can’t find a way to reduce their expenses because they have become an integral and inseparable part of their lifestyles.
And now comes the most unfortunate event that happens in the lives of more people than you can realize. In fact, you must be aware of the situation where you ended up losing money because you made the wrong decision. This happens more often than not to millions of people around the world every single day. They want to change their lives and end up taking wrong steps in the wrong direction, causing them to lose the money that they have. The best example is of people who have a very small amount in their savings and they choose an online scam to make them money.
You will notice that there are many online scams that are running in the name of Bitcoin. They tell you that you can make millions by investing with them in Bitcoin. You invest your money and get nothing in return. In fact, you later find out that the company was not what it was claiming to be. At other times, you invest in a stock or commodity and make a hasty decision about your trade. Many online traders end up using leverages against themselves when they join an online broker for the first time. They think that leverage will increase their profits, without realizing that leverage can do the same to their losses as well.
Make sure that you spend enough time researching before you finalize your decision to invest money in something. This is an introduction to personal finance. Had it been an introduction to online brokers, we would have explained to you all the types of online brokers that you should avoid. Always make your financial decisions after thorough research, even if you are only trying to discover a way to afford college expenses.
Knowing the Ways to Manage Your Personal Finances
Spend Only What You Must
You have to take some time out of your schedule to categorize all the expenses in your life. Expenses are not just expenses. They are of different types and thus they need your attention on a different level. For example, you can’t treat your medical expenses in the same way you treat your fast food expenses. Medical expenses cannot be avoided, on the other hand, if you control your desires, you will not have to spend your money on fast food. So, you will have to create categories that should tell you the expenses that are the most important in your life. You want to keep the important ones, and throw out the unnecessary ones.
This way, you will save a lot of money. In fact, you can save thousands of dollars after every few months if you follow this philosophy. So, is it necessary for you to have an air-conditioning unit in your house? Is it possible for you to manage your life without an AC? Must you use a chandelier with dozens of lights hanging from your kitchen ceiling? You have to create a list of expenses that you cannot avoid. Then, you should create a list of expenses that you can easily avoid. You have to be honest with yourself while creating these lists because your heart will tell you to put all your unnecessary expenses in the “expenses that cannot be avoided” list.
Make Investment a Priority
No introduction to personal finance should ever tell you only to save money. Saving money is a great idea, but that’s not where your personal finance management should stop. Saving money is not enough when you look at the grand scheme of things. For example, you have inflation that is always eating away from your savings. When you save money, the inflation rate in the country bites away some value of that saved money. By the time thirty years have passed, your saved money has already lost a good chunk of it to inflation. Last thing you know, the money you saved for thirty years is not enough for your later years.
Investment money is the most important part of any financial management. No introduction to personal finance should be considered complete without investment being a part of it. Make sure that you do some research to find an investment method that suits you the best. You can talk to people around you or just get in touch with a teller at your bank about the options you have available. You can trade commodities, forex, stocks, and cryptocurrencies from home or you can decide to invest your money in real estate, which is considered one of the most attractive and lucrative methods of investing money around the world.
Write Everything Down
A lot of people think that they can manage their money without writing anything down. When you talk to them, they tell you that they have all the information about their earnings, expenses, and budget in there while pointing to their heads. That’s a huge mistake that millions of people around the world make every day. Yes, you definitely have some great information about your expenses and income in your head, but when you write things down, you will see a lot of surprises. There are many expenses that you think are small, but when you write them down on a paper and calculate them, they are huge.
In a similar way, you can manage things easily when you write them down. Writing your expenses down will reveal to you whether saving a certain amount will or will not make any difference. You want to focus your energy and saving skills on an area that makes a big difference.
Take Help from Professionals
You will not be doing justice to yourself if you are not taking help from an outsider, especially a professional. You need a professional on your side who can tell you whether or not you are doing a good job with your money. At the same time, the biggest problem with most people is that they know the problem but do not know what the solution is. They do not know where to start and that causes them a lot of damage. For example, you know that you are not saving enough and that you have to invest your money in something to increase your savings.
However, you have no idea where to start with investments. You don’t know what good investments are and which markets will suit you the best based on your preferences and budget. A professional can guide you in the right direction here. Yes, there will be a fee for professional help, but you will not look at that when you know the long-term benefits of this service.
There are many different pieces that join together to form the complete puzzle of what you call personal finance. As a guide on an introduction to personal finance, you can only obtain so much information from it. The real information that you need to manage your finances well is included in many books that have been written by financial experts from around the world. They can tell you each and every tip that you need to manage your finances well. Keep in mind that the most important aspect of managing your finances is timing. The earlier you start, the better you will do in managing your finances.