Introduction to Personal Finance for the Dummies
Money is a very difficult and controversial topic to understand or to even talk about with your family .It does not matter if you grew up with money or not it is about being able to plan and BUDGET for the future. Money serves as a simple purpose: the more of it you have the more value you can leverage to maintain your lifestyle.
The most difficult aspect of building wealth is managing your TIME and staying consistent with your budget! When it comes to managing your finances many people overthink this process which then leads to confusion and irrational decisions. The average American believes in managing their finances more in a traditional way: earn, spend, and save/invest. Due to the lack of financial knowledge taught in school, we always overlook and miss the two important factors of managing our finances: Growth and protection.
Those traditional methods might have worked 100 years ago, but today’s world is ever changing so rapidly that those methods are no longer effective and might present an obstacle in one’s personal finances. It is very important to implement these two methods along with traditional ones to manage your finances efficiently. What we need to do in this new digital economy era is to rethink our whole financial management process.
This is why we created Personal Finance for the Modern Professional: to help the common people rethink the way they manage their finances.
Earn:
It’s obvious that you have to earn money if you want to accumulate wealth. It’s the only way for you to be able to save money! There are a variety of ways that you can go about earning money. Some examples include working a full-time job (which is entirely convenient), freelancing (good for people who work well on their own and can work from anywhere), or starting your own business (the most difficult way to go about earning money, but also the most profitable).
One thing you must know is that earning is not important, what is important is to increase your earning potential. Earning money is only the first step to accumulating wealth, but it’s not enough if you’re not smart about how you can increase your earning potential and income sources.
Spend:
This one might seem obvious as well, but many people overlook this part of personal finance and end up living paycheck-to-paycheck. How can you be financially successful if your spending is not under control? It’s simple really, you can’t.
A basic rule to follow in order to spend wisely is using the 50/30/20 budget (which involves paying for necessary expenses with 50%, then everything else with 30%, and saving the last 20% for emergencies). Unless you’re making at least $100,000/ year in a full-time job then you’re probably going to have to make sacrifices like cutting back on things that you think are important now. You don’t need every little thing right away; focus on building up your wealth first and then you can splurge once you’ve reached your financial goals.
Save/Invest:
The next part of personal finance is the one that most people don’t pay attention to nor have the financial education to act upon. This also the most important piece of building wealth and becoming financially independent.
If you’re not thinking about saving then to put it bluntly you aren’t doing a good job managing your finances. This just means that you want to set aside some money each month into a savings account so that you can start investing it later. You may not have enough to invest right away, but the point is that you’re being proactive about your personal finance. Saving money is something everyone should take seriously!
Investing in your savings and investments means that you’ll be putting your money to work for you. For example, if you saved $1,000 and invested it into a mutual fund then in 10 years you could potentially have more than $600 ($620 to be exact) left over after accounting for inflation! This is the magic of compound interest- which means that the longer your money has to grow, the more interest you can potentially earn off of it.
Borrow:
Borrowing money is sometimes necessary, especially when you’re young and need some extra capital. Borrowing can help you reach your financial goals much quicker because the earlier you start saving the more interest your money will have time to grow from!
Before taking out a loan or borrowing any money- research everything that you can about it first! It’s important to know the terms of your loan and what you’ll have to pay back before you borrow anything. You should also try to consolidate as many loans that you can; this will help you pay back your loans faster and save on interest.
Also, paying back your debts on or before time helps you build a good credit score. The higher your credit score is, the more money you can potentially borrow in the future!
Protect:
The final part of personal finance is to protect your investments. This means being smart with how you spend and invest your money as mentioned above, but also making sure that you don’t leave yourself vulnerable to fraud or theft. Don’t forget to set up a savings account for emergencies and increase the amount of life insurance coverage you have!
Insurance is a good way to protect yourself and your loved ones from unexpected circumstances. It’s recommended that you have at least $1 million in life insurance coverage, and to increase your coverage if there are other people who rely on you for financial support.
As we all know, having a healthy mind is extremely important to our overall well-being. Whether it be physical or mental health, both are equally significant to the quality of our lives.
Why is personal finance dependent upon your behavior?
Our behaviors influence our decisions in every aspect of life. Similarly, the behaviors also affect our financial decisions regarding budgeting, finance, savings, and expenditure. Having good financial habits is quite important as it can help grow our personal financial portfolio and help us in making better plans for the future.
Five Foundations of Personal Finance
The five foundations of Personal Finance are as follows:
- Save 500$ as emergency funds.
- Have zero debt.
- Pay in cash for your car.
- Pay in Cash for your college
- Build wealth and donate.
Personal Finance Textbooks
Some of the best books on Finance are;
- Rich Dad Poor Dad
- Money: Master The Game
- The Barefoot Investor
- The Little Book that beats the Market
Conclusion:
As a millennial, there are a lot of responsibilities on your shoulder. And once you start successfully managing your finances, half of your problems are already solved! With these four tips, you can take control of your personal finance and start building some financial wealth for yourself.
