For financial freedom, personal finance has a significant role to play. It’s essential that we plan for and manage money at every step of our lives. Without proper planning, we would be living a life of bondage, not knowing how to get off debts and credit as well as sufficiently pay our bills. Living paycheck to paycheck is a highly stressful way of living. While we may have a job that pays for our daily expenses, long medical bills or any other emergency could wreak havoc on us financially. Hence, possessing the adequate personal finance management skills can help us manage our money well. it further ensures a bright financial future.
Financial literacy is just like learning any other language. One needs to utilise and apply their knowledge to be proficient. Certain terms and concepts need to be on our tips and like any other task, even in this case, practice helps build awareness of money matters. Irrespective of our age, profession or income level, a robust understanding of one’s financial situation helps one be responsible with how they use and allocate the money that they earn.
Basic Tenets of Personal Finance
Personal finance primarily refers to the financial management of a person’s or a family’s resources. It comprises ways of managing money through investments, expenditure and savings, taking into consideration various life risks and events. Other facets of personal finance include budgeting, banking, planning for retirement, insurance, and more. The term also stands for the various financial institutions which offer financial services to a person during their lifetime.
Personal finance majorly focuses on fulfilling an individual’s long-and-short-term financial goals. Everything from having enough money for important monthly bills to planning one’s retirement constitutes personal finance.
Why Personal Finance is Essential
Those who begin savings at an early age accumulate enough money to play with later in life and easily get through the rainy days. Saving even a little amount a day can help add up enough over the years and those who regularly save reap the rewards.
Here are some reasons why financial management is necessary:
1. Helps Meet Money & Security Needs
Money issues go much beyond what we usually think about. We need to have a broader perspective of our finances as this way, we will think more than just going to work and earning money. One shouldn’t simply spend right after making money. Rather we should have a plan in place for establishing how much our income is, what our expenses are, and our future financial goals. This way we will build financial security for ourselves and fulfil our needs accordingly.
2. Helps in Budgeting, Saving & Spending
Even after earning a hefty sum every month, we could be living in huge debts if there is no financial plan in place to utilise that income judiciously. This is because we might end up spending more than we earn, sometimes even without realising it. However, someone who might be earning a mediocre income may be living a more financially sound life. This is because they plan for their money, save and live within their means. Personal finance helps us make sense of our earnings, monthly expenses and how to budget within that income.
3. Helps Increase Cash Flow
Personal finance can help us increase our cash flow. Keeping a track of our expenditures and spending patterns enables us to increase our cash flow. Tax planning, spending prudently, and careful budgeting ensure that we do not lose our hard-earned money on frivolous expenses.
4. Keeps Off Unmanageable Debts
Being overly in debt poses a serious danger to our future finances. Knowing personal finance teaches us how to manage our debts. Avoiding overspending can help us stay off debts. For instance, some people tend to change their lifestyle upon earning a higher income. This only leads to falling into more debts. Overuse of credit card can also add to our debts. This is why personal finance is essential.
5. Helps Grow Our Assets
Many people want to own assets, rather than ask for it from others, as a form of financial cushion. But several assets come with some liabilities attached. This necessitates possessing an adequate knowledge of our finances. By understanding our finances, we can determine the real value of a particular asset as well as know how to settle or cancel liabilities. This way we can effectively grow our assets.
One step towards having a stable financial future is to build a deep knowledge of our finances. It’s important that one makes a change in their spending habits and plans their budget and income before they fall too deep in a financial crisis. Every person must devote time to improving their financial knowledge so as to have a secure future.
(By Sunjay Chopra, Co-Founder & Director, Money In Minutes)