Are you earning a lot of money? If so, then good for you. But, if people expect you to have saved a lot from your income, then your smile may slowly fade. It’s because people who aren’t financially literate, or aware of personal finance management, are satisfied as long as they can buy everything they want.
Personal finance management refers to how you spend, save, and invest the money that’s coming in and out of your pocket by considering the presence of risks and your goals. That’s why people who know how to manage their personal finance may be earning less than you are, but their savings and investments may be higher than your income.
Here’s why properly managing your money is substantial:
1. Stay Out Of Debt
Debts are helpful in many ways. They can save you from due dates, startup costs, educational needs, or you can have a personal loan to finance your dream vacation.
But, you’ll only be happy for a while because when it’s time to pay them, you’ll surely empty your pockets. Or worse, you might even empty your savings or turn to more loans. But, if you want to learn how you can avoid borrowing money, read blogs from personal finance sites, like Money Task Force, for educational tips.
With accumulated debts, you might live from paycheck to paycheck. With proper personal finance management, you can stay out of debt because of the following:
- Proper personal finance management requires a budget. Because you know how much you should spend in a day, you can stop spending money when you’ve reached your limit. Thus, you won’t have to borrow money to cover your other expenses brought by overspending.
- Since you have a list of your expenses, unnecessary or unlisted expenses need a different source of income. Thus, if you want to spend on something, you must save up on it or do some side hustles. This way, you can keep yourself from using your credit card.
- With your clearly defined financial goals, you’ll be focused on achieving them. One way to achieve them is to stay out of debt. When you remind yourself that debt will only affect the length of time in achieving your goal, you can keep yourself from borrowing money.
2. Provide Direction
Not only does a proper personal finance act as deterrence from succumbing to debts, but it’ll also act as your roadmap. When you’re financially out of focus, your financial plan can remind you where you’re headed. Of course, you’ll even know how to get there with a laid-out plan.
Personal finance management lets you understand your goals and how they’ll impact your future. For instance, as mentioned above, if you stick to your monthly budget, you won’t overspend. Thus, you can stay out of debt.
The benefits of tracking your expenses can extend to a significant level of managing your finances. If you’re more comfortable writing, you can use a notebook. You can also use the technology or apps to enter your expenses digitally. Doing the latter will automatically give you data or graphs on the ratio of your expenses and actual budget.
Since you’re tracking your expenses, it’ll direct you to the right spending habits through the following:
- Financial Awareness – knowing how much goes in and out of your pocket will help you plan a better and realistic budget. For instance, you’ll understand what consumes most of your income.
- Identify Spending Issues – after knowing what takes up most of your income, you can assess whether your spending on a need or want. If it’s not too important or you can live without it, then you can cut it out of your budget.
- Prioritize Your Needs – after sorting out which is more vital, you can divide your budget according to what needs it more.
- Measure Your Progress – since you now know how you spend your money, it’ll give an overview of how near you are towards reaching your financial goal.
- Detect Unauthorized Charges – when you don’t keep track of your money, you’re more likely to forget whether you’ve actually done such charges. But, if you keep track of your money, you’ll know if someone else is using your debit or credit account.
3. Invest Wisely
As time passes, you’ll become engrossed in increasing your savings or earnings. You’ll learn that saving is not the only way to become richer. Thus, you may want to enter investments, either in stocks, businesses, and other money-making machines.
However, if you don’t have proper personal finance management, you may end up losing all your savings to an investment that doesn’t give earnings or you might even end up being scammed.
Financially wise, it’ll teach you how to invest wisely through these tips:
- Before investing in anything, you should first learn and understand what you’re putting your money into. Regardless if you want to invest in stocks, mutual funds, real estate properties, or businesses, what’s important is to understand how it works.
- After learning the ropes of investments, choose the type of investment according to your tolerance risk – investing according to your budget. Here’s an overview of the types of risk tolerance:
- Low-Risk Tolerance – if you want investment vehicles that guarantee a return, you can choose money markets, certificates of deposits, and others that’ll not worry you.
- Moderate Risk Tolerance – you have this when you’re timeline is investing in five to ten years. Although you’re willing to take some risks, you want it balanced. For such, perfect investments for this type of tolerance are riskless securities, bonds, and mutual funds.
- High-Risk Tolerance – when you’re aiming for a maximum return, you’ll go for the highest-earning type of investments. Thus, you can accept stocks that can go down to the bottom or stocks that are volatile.
- Depending on the type of tolerance you have, it’s important to invest only in what you’re willing to lose. For any investment, you must limit your expectations from gaining little to losing your money. That’s why you must not invest your emergency funds or your savings. Thus, you must allocate a fund to help you start with your investment.
With proper personal finance management, you can grow your money as much as you want. Because you have the discipline to plan your budget and stick to it, reaching your financial goals become easier.
No matter how hard the path is, with proper personal finance management, you can control your money to achieve financial freedom.
That being said, start managing your finances and see the result.
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