Do you know why personal finance is important?
Whatever your age and earnings, good personal finance skills will help you achieve financial security through better money management.
It can also help you live a happier and healthier life.
How? Read on to find out.
What is personal finance?
Let’s start by explaining exactly what personal finance means.
Personal finance is a term used to describe managing your money, saving and investing.
It also includes banking, budgeting, insurance, investments, planning for your retirement and taxes.
The main goal of personal finance is to achieve short-term and long-term financial needs and goals such as saving for a new car or putting money aside for your children’s future education.
5 reasons why personal finance is important
1. Allows you to easily manage your money with a budget
Why is it important to manage your money? Simply because without a budget, it’s impossible to know if you are overspending or not. And if you don’t know which areas you are overspending on, it’s hard to make the right financial decisions to turn bad habits into good ones.
Starting to manage your finances will give you a better perspective of where and how you spend your money. In turn, this will help keep you within your budget and even increase your savings efforts.
Assess your priorities by writing everything down in a list and consider what spending areas are the most important to you.
If you need to make cuts, start by reducing spend on your lower priority areas.
Sticking to a budget will also help you achieve your financial goals. Every month you save, you are a step closer to achieving your target.
2. Provides financial security for your family
If you’re on a mission to provide financial security for your family, good personal finance is extremely important.
Anything can happen to your wealth or savings at any point in your life, which is why learning how to manage your personal finances is crucial for your family.
Here are some ways that you can achieve a secure financial future.
Expand your emergency fund: managing your money effectively will allow you to save for the unexpected, without relying on credit cards or loans.
Get life insurance: life insurance is essential if, like most people, you have loans for things that are not yet paid for such as your house or car.
3. Keeps you out of debt
Not all debt is bad. For example, taking a mortgage loan out to buy a house and pay it off over 20-30 years is a good investment.
However, debt on credit cards or loans that are caused by overspending and poor budgeting will leave you worse off because of added interest.
Being in debt for too long can also impact your future financial stability. Last year, consumer debt grew to just under $14.9 trillion.
A good understanding of personal finance can manage, reduce, and even eliminate, bad debt.
The best way to get rid of debt is to avoid overspending on things you can’t afford.
A financially savvy person will save a proportion of their paychecks until they could afford an item they desire, rather than getting the credit card out and ending up in debt.
If you’ve got debt, some basic personal finance knowledge will help you tackle the debt directly.
A good place to start is by making a list of all your debts, in order of the highest interest.
Prioritizing debts will help you effectively manage them.
Next, look at your budget and add in your debt repayments based on how much you can afford to pay off each month (the more the better).
Research balance transfers to help reduce the cost of borrowing.
The money you save on interest can be used the pay off the balance, rather than just the fees.
4. Helps you meet long-term financial goals
Another reason why personal finance is important is the way it helps people meet financial goals.
When setting financial goals, ask yourself what you want to achieve, when you want to achieve it by and what the steps are to achieve it. Goals should also be SMART (specific, measurable, achievable, relevant and timely).
This will ensure your financial goals are reachable, meaning you will be more likely to meet them.
A popular long-term financial goal for most people is to save enough money for retirement.
To achieve this, personal finance skills are required to start putting money aside as early as possible.
An understanding of personal finance will help you decide which goals are realistic and which ones should be avoided.
Personal finance management will help you come up with the best strategy for meeting your goals.
For example, if your goal is to reduce spending and save more money, monitoring daily expenses is an effective way to achieve it.
Monitoring financial goals is the only way to find out how close you are to meeting them.
Personal financial management skills will ensure you know how to check what stage you are at in reaching your goals.
Set your financial goals by following these 6 simple steps:
- Write a list of everything that is important to you.
- Decide which goals are in reach, and which should be part of your long-term personal finance strategy.
- Turn your ideas into SMART goals.
- Create a realistic budget to help you meet your target.
- Use any leftover cash from other areas of your budget to top up your goal funds.
- Monitor your progress. If you’re not hitting your targets, re-assess your budget and make changes to get you back on track.
5. A lack of financial literacy has consequences
Why is it important to be financially literate? Good financial literacy will help you make the most of your income and savings.
If you’re financially literate you can make savvy financial decisions that will help you save money.
Making poor financial decisions can give you a poor credit rating, which in turn can affect your ability to borrow for mortgages and other large purchases.
Bad credit history could even affect your employment options in certain industries.
The good news is that financial illiteracy can be overcome.
Here are 5 ways to improve your financial literacy and start making the right personal finance decisions:
- Subscribe to financial newsletters: free financial newsletters will cover the latest news from trusted sources, so you don’t have to browse the internet for the latest advice.
- Listen to finance podcasts: learn about finances while you’re on the go through podcasts.
- Read personal finance books: there are hundreds of personal finance books to choose from if you prefer reading a book to learn about a subject.
- Follow financial experts on social media: LinkedIn and Twitter have lots of industry experts who regularly share tips and tricks that will boost your understanding of personal finance. Alternatively, join a personal finance Facebook group and learn from other people’s experiences.
- Talk to a financial professional: to help you change your personal finances, talking to somebody who specializes in this area can help you get a handle on your situation and take a step in the right direction.
The path to financial freedom
Money plays a part in almost every aspect of our lives, so it’s important to manage it well.
So, if you strive for financial freedom, brushing up on your approach to personal finance is a good place to start. Make changes today that your future self will thank you for. Keep up to date with the latest financial advice on our blog.
