Personal finance! Why is personal finance important? Not many people have a clue. And those that do, still struggle to streamline their finances. As such, this piece shares some of the most important reasons why you should be able to manage your money. Thank me later.
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Have you ever sat back to think why personal finance is such an essential aspect of your life? Well, sometimes we are so caught up in our daily activities that we forget how crucial it is.
But not to worry. This article will try to answer just this question. We must understand why we must manage and plan for our money at every step of life.
Without personal finance, it is possible to live a life of bondage without knowing how to get off debt or adequately pay your bills. So, when seeking financial freedom, personal finance plays a significant role.
Having the necessary personal finance skills will help you to ensure all your money is managed well. This will help propel you to a bright financial future.
If you wish to accomplish your financial goals, you must manage your spending, have an investment plan, as well as select the right insurance. Things like Lemonade have helped people find better insurance. They offer low, competitive prices on home and rental insurance.
So, why is personal finance important? Let's dive right in…
Table of Contents
What is Personal Finance?
When we talk about personal finance, the term is usually used to refer to the financial management of an individual or a family's resources. It comprises how you manage your money through expenditure, investments, and savings, considering various life events and risks.
Other aspects of personal finance include banking, budgeting, retirement planning, insurance, and estate planning. In other words, the term can stand for the entire financial industry in an individual's life. This includes all the institutions that offer financial services to an individual.
Personal finance focuses mainly on meeting the individual or a person's financial goals, both long and short-term. Whether you have enough money for your essential monthly bills or want to plan for your retirement, this is all personal finance.
Being financially literate helps a person to distinguish between financially beneficial decisions and detrimental ones. This way, they can make sound decisions that offer hope for their financial future.
Having a plan for your finances will help you meet your short and long-term needs, without going beyond your income limits. And the sooner someone starts to plan their finances, the better.
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Why is Personal Finance Essential?
The purpose of financial planning can never be exhaustively explained. The reasons are numerous, but we will look at the main ones.
1. Ensures that You Meet Your Money Needs
First, we must understand that money issues go beyond what most of us think about. We should think of our finances from a much broader perspective. This way, we will think beyond just going to work and making money.
What comes after making that money? Do we spend it? Well, this shouldn't be the case.
We should have a plan that establishes how much our income is, what our expenses are, what plans we have, as well as our future financial goals. This way, you will think beyond just working to earn money.
Some of the topics that you should understand in personal finance include:
- How to create and stick to a budget
- Timely payment of bills
- Managing loans
- Net Income vs. Gross
- Saving for your retirement
- Time value of money
- Credit cards and credit scores
- Inflation, and more.
Having proper personal financial knowledge and skills is crucial. It gives you an advantage when facing financial challenges, opportunities, and responsibilities that comes your way.
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2. Easily Manage Your Income
If you don't plan for your income, you will end up overspending or spending on unnecessary items. But with a proper financial plan, you will be able to manage your income effectively. This way, you will spend on what is necessary and save or invest the rest.
Knowing how to manage your income will help you to determine which expenses to handle first and which ones come later. Also, you can effectively know how much is necessary for tax payments, savings, or clearing your monthly bills.
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See Related: Helpful Pieces of Financial Advice
3. Budgeting, Spending, and Saving
Even if you earn a $200,000 salary every month, you can still be living in huge debt if you don't plan for that income. This is because you may be spending much more than you are earning, sometimes without your knowledge.
However, someone else may be earning a quarter of this but still, be living a more financially stable life than the former. This is so because the latter has planned for their money, saves, and lives within their means.
Personal finance skills help you to understand how much you earn and what your monthly expenses are. This helps you to budget within that income.
According to Defined Sight, “a closely watched budget can be the one thing that prevents you from overspending on status symbols and luxuries like expensive cars.”
Living stingy or sticking to what your budget indicates helps you avoid so many overspending temptations. For example, you can avoid moving to a luxurious neighborhood to fit in a friends club by referring to your budget. The budget should show you if moving is on your list of things to do.
If your income doesn't allow it, or you have some other things planned for, you can forego the shifting. This is only possible if you have a budget and stick to it.
Personal finance affects even the little necessary things like transport bills and groceries. Not forgetting the longer-term goals like saving and investments.
As Dave Ramsey said, “Don't spend more than you earn!”
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4. Personal Finance and Cash Flow
Another reason why personal finance is essential is that it can help you to increase your cash flow. When you keep track of your expenditures and your spending patterns, you can easily increase your cash flows.
Things to help you to grow your cash flow include:
- Tax planning,
- prudent spending and
- Careful budgeting
All these will ensure that you do not lose your hard-earned money to unnecessary expenses. Therefore, having a personal financial plan is vital to ensure you are on the right financial track.
You can take a look at our blog on a personal financial plan example for more information.
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See Related: Personal Capital Review
5. Offering Family Security
Financial security for you and your family is something that most people long for. Everyone wants to know that they can cater to the money needs of their family, whether the economy is failing or not.
No one wants to think of their families suffering due to a lack of money, especially when they are not around to help. And for this reason, everyone is struggling to ensure that they earn enough money that can offer them a sense of security.
If you want to have financial freedom and a sense of financial security, then you must plan for your finances. If you have the right insurance policy, you have invested, and you have made proper savings, it will offer peace of mind both for you and your family.
See Related: Ways to Save Money on a Tight Budget
6. Offers Better Financial Understanding
Yet another importance of personal finance in life is providing a better understanding of your finances. It is possible to achieve a better understanding of your finances when you put in place measurable goals, understand the effects of your decisions, as well as review the results of such.
This gives you a completely new approach to budgeting and provides better control over your finances.
See Related: Reasons Your Debit Card Declined
7. Keeps You Off Unmanageable Debts
Having a few debts is not a problem. Being overly in debt, however, is dangerous to your future finances. It's vital to manage one's debts in a way that guarantees no harm is done to your future financial stability.
If you want to grow your wealth quickly, you must know how to manage your debts. That is why personal finance is critical to ensure that this happens.
One way to stay off debt is to avoid overspending or spending more than your income. For example, most people tend to change their lifestyle when they have an increase in income. However, they do so in a higher proportion than their income increase, which only leads to getting into more debt.
Also, when you overuse your credit card, you are adding more to your debts. Therefore, this is another reason why personal finance is essential.
Through personal finance education, you learn how to manage your money and break out of detrimental financial habits.
See Related: Life Insurance Questions to Ask
8. Growing Your Assets
Owning assets rather than asking for assets from someone else as a form of financial cushion is always a desire for many people. However, many assets will come attached with some liabilities.
This makes it very important to have adequate knowledge of your finances. One must be able to determine the real value of a specific asset.
Knowing how to cancel or settle liabilities only comes through understanding your finances. And this is only possible through personal finance. This way, you will be able to grow your assets, ensuring they will not become a financial burden in the future.
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See Related: How to Start with Personal Budget Monitoring
9. Raising Your Standards of Living
Another importance of financial planning is helping you to increase your living standards. But how does personal finance help you to do this?
Well, the more you plan for your finances, the more your savings will be. This means that instead of more money going to unplanned expenses, more will be saved.
Higher savings can help to cushion you during financially challenging times.
See Related: Personal Capital vs YNAB
How to Grow Your Personal Finance Knowledge
Why is personal finance important? That one is tackled. Now, how do you achieve proper personal finance knowledge? Here are some tips:
1. Personal Finance Blogs
This is the easiest way to go about it. Why? The internet is just a click away, and it's full of credible, information-rich financial blogs. These will get you everything you need to know about personal finance.
There are tons of blogs about budgeting, savings, frugal living, and even making more money online. So, whatever you want to change in your financial life, personal finance blogs can be a great source of information.
2. Online Courses
Online courses could also be what you need to change your financial status. And there are numerous of these online.
You can get courses on any topic, including budgeting, improving your credit score, reducing your debt, investing, savings, and more. All you need to know is the area you are struggling with and find the best course.
Some of the best platforms to source for personal finance courses include Coursera, Udemy, and Skillshare. For instance, you can try out the following courses:
- Personal and Family Financial Planning from Coursera
- Personal Finance Masterclass on Udemy
- Investing Basics for Millenials on Skillshare
Buy any of these courses and start your journey to better finances.
3. Reading Personal Finance Books
While not many people love reading books, they can be a great source of information. This includes personal finances.
You'll find books on budgeting, investing, retirement planning, and even real estate. For instance, if you want to get better at personal finance while managing your taxes effectively, then you can read any of the following bestselling books:
- The Total Money Makeover: Dave Ramsey
- The Intelligent Investor: Benjamin Graham
- Rich Dad Poor Dad: Robert Kiyosaki
When you read these books, you'll learn how to get the most out of your money. You'll also understand key investment strategies and build a better financial future. And if you want a wide variety of books, you can also check out our list of best financial books on financial independence or best books on passive income.
4. Podcasts
Listening to podcasts can also be an excellent way to educate yourself on personal finance while multitasking. And there are tons of personal finance podcasts out there that you can listen to anytime, anywhere.
Some great podcasts you can try out include:
Just like reading books and blogs or taking online courses, these podcasts will equip you with the knowledge you need to manage your finances better and make sound financial decisions.
5. YouTube Channels
YouTube is also an amazing resource for personal finance topics. You'll find several channels that offer advice on money management, budgeting, and investing. Just type in ‘personal finance’ on the YouTube search bar, and you'll get a list of channels to choose from.
Some great YouTube channels worth checking out include:
These channels will give you the latest financial tips and advice that can help you grow your wealth quickly.
6. Hire a Financial Advisor
If you still can't crack it, hiring a financial advisor would be an excellent choice.
A professional will help you understand how to manage your money correctly and build wealth faster.
In addition, they will be able to provide personalized advice that fits your current situation. This way, you'll know exactly what steps to take to meet your financial goals.
You can find a financial advisor near you or contact an online platform like SmartAsset or Betterment. These platforms offer virtual financial advisors to help you build wealth and manage your finances seamlessly.
Best Tips on Managing Your Finances
Ultimately, to get better at managing your finances, there are some tips you can follow. These include:
1. Create a Budget and Track Your Spending
A budget dictates how much money you have and where it goes. This ensures that you don't overspend or make unnecessary purchases.
On the other hand, tracking your spending shows you exactly where your money is being spent. As such, you can decide which areas to cut on spending and which ones to add. These two help you stay within your spending limits.
2. Pay off Debt
Debt can be a major obstacle to achieving financial freedom. Therefore, pay off whatever loans or debts you have as soon as possible to improve your credit score.
Ensure that your debts are manageable and that they don't put too much strain on your finances. If not, you might be digging yourself into a financial hole that will be impossible to come out of.
3. Invest Wisely
Investing your money means growing it. You can put your money in a savings account, stocks, mutual funds, or bonds. Doing this allows you to make more income and get returns on your investments.
More income means financial stability and a better financial future. And diversifying your portfolio is one way to ensure a financially stable future.
4. Save for Retirement Early
Retirement planning is essential for having a stress-free future. Therefore, start saving for your retirement as early as possible.
This will ensure you have enough funds to live comfortably and pay for your medical expenses when you retire. A 401K or IRA are great ways to get started with retirement savings.
5. Review Your Finances Regularly
Make sure that you review your finances periodically. Doing so allows you to check for errors and also track your progress in managing your finances.
You can use online financial tools or set up monthly reminders to review your budget, investment portfolio, and spending. This way, you'll be able to make the necessary changes or adjustments if needed.
Conclusion on Why is Personal is Important
Trying to understand your finances is one step to having a stable financial future.
And, although some will still not make a change until they are too deep in a financial crisis, I hope that you won't be one of those who will always ask, “Why is personal finance important?” after this article.
Make a change now, and impact your future finances.