Personal Finances: what are they and why are they Important?
For many people, talking about money is almost a taboo. However, every day we handle money and make transactions with it.
If you think about it, everything you do has to do with money… and also what you don’t do… You go to work in exchange for a salary, buy food in exchange for money, consume electricity, water, internet, telephone, etc. in exchange for a monthly fee.
Despite all this, no school syllabus includes financial education as a subject. And unfortunately, few homes teach what personal finances are and its importance.
Personal finances is a serious subject, and learning to plan them will allow you to have a healthy economy in the present, and to be able to project yourself in the future, achieving your dreams.
Personal Finance: What are they?
Finance is a broad economic term, encompassing the study of transactions and the administration of money and goods between different economic entities.
Many people are left with this concept associated with other more complex terms such as the stock market, investments, etc… and that is where the main block appears to learn more.
Wikipedia says that “Personal Finance is the financial management required by an individual or family unit to budget, save and spend their monetary resources over time, taking into account financial risks and future life events”
In other words, personal finances have to do with the administration and handling of YOUR money and YOUR assets.
And why is it important to understand your personal finances?
Most people don’t have financial education, and they don’t do monthly planning because they think it’s too difficult, or worse yet, they think they don’t need it because they don’t earn thousands of euros a month. However, these same people juggle at the end of the month because it is not enough to cover all expenses.
Believe me I have heard many cases like this.
Obviously, there are cases that planning alone doesn’t solve, but I’m not going to talk about them here.
The main objective of personal finance is to help individuals and families to have a stable economy and achieve their goals, optimizing the management of their resources.
Therefore, my intention is to familiarize you with personal finances so that you understand how they work and how to manage your money in the most appropriate way for you.
If you think that because you don’t earn thousands of euros a month you shouldn’t learn to manage your money intelligently, you’re wrong, my friend. For the simple fact of having money in your hands you already have personal finances, bad or good but you have them.
So it is better to learn to make intelligent use of these resources, to be aware of the decisions you make when you use your money because any decision can benefit or harm you in the present and in your quality of life in the future. Isn’t this important enough for you?
7 Tips for having good personal finances
1. Create a personal budget
When I talk about budgets, the first thing many people think is “I’m going to stop doing this or that” and of course, they get overwhelmed.
The truth is that having a budget has many advantages.
For example, it helps you to keep track of your expenses and above all to plan how much money you are going to allocate to expenses and savings. This will make your life more bearable. And you will see that it is not complicated at all.
Another benefit of making a budget is that it helps you analyze the sources of income that you have now and look for new ones. In this article I mention some ideas
Also, having a budget helps you to be aware of the debts you have. And if this is your case, your main objective should be to pay them off in order to start saving. However, it is also necessary to value according to the interest rate of said debt, since if the interest rate is low you could value paying little by little and thus allocate part of your money to save.
One of the ways to plan your finances is by following the 50/20/30 Rule . It is about dividing your money each month into three groups by percentages: 50% for necessary expenses, 20% for savings and 30% for variable expenses. You can also adapt the percentages to your standard of living, but this rule can serve as a guide.
2. Create a financial buffer
A financial buffer is an amount of money set aside to cover contingencies, those unexpected expenses such as car repairs, the purchase of a new broken appliance or the rent payment if we lose our jobs.
The ideal is to have saved at least the equivalent of between three and six months of your necessary living expenses. (That’s why it’s important to have a budget! That’s how you’ll know this information). This way you will be able to live between three and six months covering your needs if it happens that you lose your job.
Obviously, this is a recommendation. You decide with what amount you would feel calm if tomorrow you run out of income.
When you reach that amount, you can continue saving and allocate that money to another financial goal such as retirement, for example.
3. Think about your retirement
One day you are young, and the next you start thinking about retirement!
That’s how it is. I also consider myself young and sometimes I think that my retirement is still an eternity away, but it will come before I know it. Better to be prepared, don’t you think?
Here I am going to get a little more technical, because the younger you start, the more advantage you will get for your money. What advisers call “the magic of compound interest”.
And what is this compound interest?
It is the amount of money that you have generated over a period of time and is added to the initial capital, and on which new interests are produced. It is a multiplier effect.
This article explains very well what compound interest is .
4. Allocate a percentage of your income to savings and divide it
For me, your financial mattress and your retirement are the two essential savings destinations that we should all have.
After having incorporated this into your budget and depending on your needs and income, you can think of other destinations for your savings, and in different terms (short, medium and long). For example: for a house, to start your own business or for the trip of your dreams.
A recommendation: give names to each of your savings goals. If you identify the destination of the savings, it will serve as motivation because each month you will be one step closer to making it a reality.
Think of that trip to the Caribbean, lying on the beach with a mojito in hand… It’s easier to save that way, don’t you think?
5. Make money work for you
Do you know what inflation is? It is what makes your money lose value every month.
That’s why saving is fine, but it’s much better if you make that money work for you and you don’t have it under your mattress.
Investing , aiming for returns above inflation as a minimum.
6. Use credit cards wisely. If you don’t have them, better!
Currently, it is common for your bank to offer you a credit card without asking for it. But you have to be careful with what this little piece of plastic means.
When you use your credit card, you are creating a debt with your bank.
If your goal is to reduce debt or not have them, it is best to avoid using them.
But if something unforeseen arises and you have no other option, let it be just for that and make sure you pay as soon as possible.
7. Give yourself some reward from time to time
If you are one of the people who thinks that planning means depriving yourself of many things, it is important to have some reward so that you can enjoy your good work.
Although having a budget and planning are important. It does not mean that you have to limit your life or take away the activities that you like to do the most and that make you happy.
Having a budget is about making decisions with the peace of mind that your finances are fine now and in the future.
Treat yourself from time to time, do what makes you smile just thinking about it.
Personal finances are important to everyone. Because we all want to have financial peace of mind in the present and in the future. That is why understanding them is the first step.
Do not worry if you have not received financial education before, the important thing is to start and that is why you are reading this article.
My recommendation is to start by taking control of your expenses. So that you are aware of how your finances are now. Good or bad are what you have now, and from there you can make decisions to improve.