There is no question of why we must not save our finances for a rainy day. Budgeting is crucial to successful financial planning and without it, we cannot possibly imagine ourselves planning new investment options or rejigging the old ones. As cliché it may sound, we must devote some hours of our everyday lives to assessing our finances. This helps unless we do not mind getting steeped in debt or living off on credit our whole lives. If financial freedom is your motive, it makes sense to plan your finances every day and gauge your fiscal strength regularly. Not all are adept at personal financial management skills though a sound understanding of savings and investments can go a long way in securing our finances in the long run.
Understand the basics of personal finance
To start with, learn the basic tenets of finance. Why is it important to keep earning so that we can plan our future without worrying about the much-needed capital? Why is it important to save a part of our money for the future? How much should we invest? Why do our financial goals matter while investing our money? Why should we be aware of elements of finance including banking, budgeting, retirement planning, insurance and more? When will we realize that investment and insurance are not the same and that instruments promising the benefits of both must be avoided? Why should we look at the fees charged by various financial institutions before parking our earnings with them? Why do average returns over the period matter? Most importantly, how do we decide our allocation between investment options like equity, debt, gold, real estate and more?
Handling your finances early
Handling your finances early in life should not be limited to starting earning as early as possible. The idea must be to start investing money early in life. Not many understand how the power of compounding is effective only when you stay invested for a considerable time in the market. The time in the market is more important than timing the market. That is why you must invest early than wait for dips to invest in your choice of financial instruments.
Budgeting helps you understand how much you must allocate to your regular investments. Also, a lump sum investment may not always be possible or in the best interest. Saving and investing in staggered money can work wonders if continued for a prolonged period.
For those who want to understand why personal finance is essential in our day-to-day lives, managing your finances regularly can help you in the following ways.
Meet money and security needs in future
Money issues are more than just what we have in the bank. Financial management is about whether we have saved enough for both our near and distant future. Your thinking must be beyond just earning and saving money. Your mind must be permeable enough to absorb the various fundamentals underlying financial instruments and then decide on those that serve you best. The tendency to spend comes naturally to most of us. During those times, hold your mirror to view your possible future without money or a solid financial backup plan. Don’t deny yourself ways and means to be happy, but remember not to go overboard with your expenses. The money you spend on your movie tickets every month can well be invested in mutual funds or other instruments through systematic investment plans (SIPs) and, thus, help you create a sizeable corpus.
Helps arrange necessary cash flow
What if we suddenly need money and then realize that all our money has been spent on some pretext or the other? This explains why we must keep a record of all our expenses to estimate our spending patterns and then spend accordingly. Cutting down on unnecessary and unwanted expenses can help increase our cash flows. Exercising prudence over our spending behaviour can help you save more for the rainy days. More than just curbing our expenses, we must take care to carefully budget our earnings and plan our taxes carefully so that we do not lose our hard-earned money.
Paying off debt
You may argue about good debt and bad debt, though unarguably, debt remains a liability that must be repaid. This is where personal finance management helps as you realize how getting rid of debt early can help you save more money that can then be invested and reinvested for future use. Also, make sure not to incur too much credit debt to meet your lifestyle expenses. Extreme use of credit cards can lead to huge debt followed by an equally heavy penalty for non-repayment. This explains why some understanding of personal finance is crucial in our day-to-day lives.
Securing a financial cushion
Surely money does not grow on trees but you could always make it available for yourself by saving enough and investing the saved amount to ensure enough for your future. Saving necessitates common sense while investing mandates a sound understanding of personal finance management. This is because we can invest in an asset only after realizing how much it is worth and then pay for it accordingly. Also, the extent of financial liability that you may incur on not repaying a debt requires some understanding of personal finance. So be it to grow our assets or reduce our liabilities, understanding personal finance daily does help.
Planning the roadmap head
A step ahead can lead you to either an abyss or a sound future. A lot depends on how you seriously envision and comprehend your future. If you are keen to build a stable financial future, it makes sense to inculcate a deep understanding of finances. A cursory understanding of how money works may help in the near future but will not help you to build the kind of corpus or secure retirement benefits that you may be gunning for.
Personal finance management starts with budgeting your money from where you move on to gradually saving your money. Then you gradually invest in instruments after considering myriad factors that help to assess their viability and profitability in the long run. Evaluating debt and the extent to which it must be allowed in your financial statements is only possible only when you understand how an innocuous-looking liability can dent your finances in the long run, if not repaid in time or early.