Do you want to take the first step in managing your finances and make sure you are prepared for your future? The first thing you should do is learn about personal finance.
Financial decisions and activities that affect an individual or a household is a part of personal finance. This includes budgeting, insurance, mortgage planning, saving and retirement planning. Investopedia defines personal finance as “all financial decisions and activities of an individual or household”.
It’s important to understand the difference between these three terms if you want to make sound financial decisions and plan for your future.
Important Personal Finance Terms
Budgeting — Establishing a monthly budget is important in order to stay on top of personal finance. It will allow you to know your spending habits and plan ahead where you are going to invest your money each month.
Conduct a monthly cash flow analysis by calculating your total monthly income and tracking all of your expenses. This is a sure fire way to assess where money is being lost, which areas of the budget can be cut and what you can spend more freely on.
Insurance — Purchasing insurance is a little known but very important aspect of managing your personal finances. Investopedia defines insurance as “a safeguard against risk” that allows you peace of mind in your day-to-day life. Just like car and home insurance, health and life insurance protect you from potential accidents that may cause you to miss out on the security of a steady job.
Savings — Whether you’re in your 20s, or in your 30s, all people nowadays should be paying off their debts and saving for the future. This will allow them to not only ensure they can provide necessities to themselves and their family when they retire from work, but also protect them from unknown financial risks.
It’s important to have an emergency fund and a retirement plan. If something goes wrong with your finances, you can turn to your emergency fund and in the future when you retire, you can depend on your retirement savings plan.