Personal finance is the financial management which an individual or a family unit is required to do to obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. Simply said, it is your plan to make, spend and invest money as it relates to you. How will you achieve your financial goals?
As a lifelong planner, I try to leave very little to chance. It has worked for me very well because I managed to achieve every financial goal I set out to do. I used the process of SMART goals before it was fashionable! It starts with the basics; write down your goal and make it and make it specific, measurable, attainable, realistic and timely. Monitoring your progress and adjusting your effort is key to your success.
How to improve your personal finances
Living within your means can be difficult if you are not earning enough money. Whether you are earning minimum wage or hundreds of thousands of dollars, you should live within your means. If you spend more than you earn, you will likely lose your home, car or something else and ultimately ruin your credit. You can avoid many problems by just thinking about your spending before you do it.
What can you do?
· Start with you goals – You would not get on a plane if you did not know where it is going, would you? Yet, you abandon that thinking when it comes to your personal finances. Start with your financial goals such as paying off debt, buying a home, marriage, children or retirement.
· Saving and Investing – The first step to achieving financial goals is usually saving money or paying down debt. Paying down debt will release more money for savings. If your debt is at a low interest rate, you may save and invest anyway. If you have high interest consumer debt, you may have to pay it off first.
· Budgeting – Budgeting does not have to be difficult. You should think of budgeting as a structure to help you achieve your financial goals. It is a good way to help you plan and achieve your goals. You become familiar with your expenses and you can take action regarding your spending habits.
· Long term planning – Budgeting is an annual exercise to help you achieve annual goals. Your annual goals should be part of a longer term planning process. Long term planning are for the goals that take longer than one year. It may be retirement, starting a business, buying a home, marriage, children, or some other major purchase.
· What if my plans change? – Whenever you make plans for a long period of time, plans may change. It is almost expected! All long term plans should be reviewed annually to measure progress and adjust your effort. Retirement (investment) plans is just one example of long term plans that need to be reviewed annually.
Part of the budgeting/planning process is evaluating your spending. I think an important part of evaluating your spending is determining if you really need something. Part of that process is determining the value of a product or service. For example, do you need cable TV or do you just want it? If you set a goal of saving $X, you will have to find enough money to meet your goal. How do you evaluate your spending?
Evaluate your expenses
· Question spending – Stop mindless spending! Think about every one of your expenses. Should you live in a luxury apartment? Do you really need a luxury car? Your apartment rent should not exceed one week’s salary. Cars depreciate or go down in value every year. Do you really need it? How much debt (payments) should you have? What is your debt to income ratio?
· Separate wants and needs – You can justify every expense and never change anything! Separate your expenses into two categories of needs and wants. Analyze your expenses in order to reduce or get rid of a particular expense. If you start with a financial goal of $X amount for savings and make your spending fit with that goal, you will will find what change syou are willing to make in order to achieve your goal. If you are unwilling to drop cable TV, you need to find another expense to reduce or remove.
· Review your expenses monthly – Just doing it once for a budget or financial planning is not enough! You need to constantly review, monitor and adjust until it is a habit. It is the best way to control your expenses and spending.
How are you doing?
Good, bad or just so so? Just controlling your personal finances is a great first step, but don’t stop there! Having long term goals and creating a plan to achieve it is the best way to achieve your goals. Talking about wishes and dreams is nice, but unless you develop the goals and plans you will never reach them. It is up to you to stop making excuses why you cannot do it and develop a plan to do it. What are you going to do? Is personal finance just a label for financial mess?
Photo by: Flickr