Why Good Personal Finance Management Matters
Even if you don’t have any major money goals right now, it’s essential to practice good personal finance management so you can prepare yourself for the future. After all, you never know when an emergency could hit you or your circumstances will change—why wouldn’t you want to set yourself up for success? If you’re starting to realize the error of your ways, you’re in the right place to get clued up.
There are some things we blatantly can’t live without, like food, water, and oxygen. And then there are the things that (at first glance) it seems like we don’t really need. For most people, personal finance management falls under the second category—but does that mean you can afford to ignore it? Hardly. If you don’t look after your money, you’ll be at the mercy of whatever the world throws at you and your finances.
A little disposable cash goes a long way, but it can be daunting to set up a system for the first time if it’s something you’ve neglected up to now. But not to worry—from credit cards bills to investment plans, we’ll cover it all (and then some).
Introduction to personal finance management
Babies don’t leave the womb with an understanding of how credit scores work or methods of making tax-free investments, so in an ideal world, parents and schools would teach us everything we need to know. Unfortunately, more often than not, they let us down, meaning young adults go into the world making every financial mistake in the book.
But it’s never too late to get back on track with your finances.
What is personal finance management?
Personal finance management covers just about everything related to the finances of an individual or household. That includes:
- Retirement and pensions
- Investment accounts
- Insurance policies
- Loans and credit cards
- Saving and budgeting
You can’t just live in the moment when it comes to money. Our monetary resources aren’t unlimited and everyone has financial goals—whether that’s to get a mortgage, pay for your child to attend college, or simply to be able to retire. None of this is possible without paying some serious attention to your finances.
How to practice solid personal finance management
Now you know what personal finance management is, you’re halfway there to pulling it off yourself. There’s a lot to learn here, so we recommend finding a few personal finance blogs, YouTube channels, or books (we like “The Psychology of Money”) to ensure you’re informed.
But to help you get started, we’ll outline a few of the most important elements of personal finance management.
Track your spending
Saving money and budgeting tend to get all the attention when it comes to personal finance for beginners, and they’re definitely important. But something else should come first: a basic awareness of your spending habits.
There are now a lot of apps that connect to your cards and banks and will automatically track your spending for you, and you can also add your spending to a spreadsheet manually. Either way, make sure you’re diligent about recording everything (even if the truth is hard to bear). The mere act of writing down your true spending patterns will often help you to reduce your spending. Ignorance is bliss, and awareness leads to actions.
Only when you know exactly how much you’re spending—and what you’re spending on—can you begin to put together a strategy to help you save more.
What should you use your extra savings on? That leads on nicely to our next point.
Create a contingency fund for emergencies
One of the greatest advantages of being careful about your spending is that, with any luck, it means you’ll have something left over at the end of each month. But don’t just stash your savings away aimlessly and hope for the best; build an emergency fund.
A contingency fund for emergencies is a pot of money you should leave alone for the most part but dip into when an unforeseen event that requires money crops up. For instance, you might use it when you need to buy a replacement computer or if you get made redundant from your job.
Most experts recommend setting aside at least three months of expenses in your emergency fund, if not six months. Clearly, you need to track your spending to know how much you need to put aside, which shows how all aspects of personal finance management tie together.
Work on your credit score
Once you’ve begun to tackle basic principles like getting your spending under control and putting something aside for emergencies, you can move on to slightly more advanced concepts like improving your credit score. The better your score is, the more choice over loan providers you’ll have in the future, and the lower the interest rates you’ll be offered. Even if you’re not planning on taking out any loans, you might be considering a mortgage—and trust us, a good credit score is always useful.
First of all, get any debt under control by tackling it head-on. Don’t just make the minimum payments; pay as much as you can, starting with the loans that have the highest interest rates (usually credit card debt and payday loans).
Interestingly, you shouldn’t avoid debt altogether, either. If you use a credit card the right way, it will help you to improve your credit score by proving that you’re capable of paying off loans you take on. Plus, you can benefit from credit card points and cashback that you can use toward free airline tickets or other purchases. Why say no to free money if you can be responsible?
Be smart about your investments
Investing isn’t necessarily a bright idea if you’ve still got debt and you haven’t yet put anything aside for emergencies—that could just result in you having to sell your investments at an inconvenient time. But once you’ve got these boxes ticked, you can start to think about how you’re going to make your money work for you.
Yes, we’re talking about creating an investment strategy.
There are lots of factors you’ll need to consider here. Are you investing to save for a short-term goal (like funding your kids’ education) or a long-term goal (like retirement)? How much risk are you prepared to take on? Can you take advantage of any tax-efficient accounts, like Roth IRAs?
The right way to invest varies between people, but it’s always advisable to diversify your investments by investing across various asset classes and markets. This boosts the chances that, if one asset underperforms, you’ll still be compensated by the others and earn a positive return overall.
Take your money further by investing with MyConstant
Investing is one of the cornerstone principles of solid personal finance management, and as we’ve seen, it’s a good idea to take a diversified approach. Can you see cryptocurrencies playing a part in your strategy?
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- Up to 7% APR on fixed-term investments
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