Personal Financial Management
Personal financial management is a daunting and continuous task that can cause even the most economically savvy individual to become confused or short-sighted.
Indeed, in a world where assets and investments move quickly and we link our bank accounts to innumerable services and make purchases with the touch of a button, financial management is a trickier concept than ever before.
To make the most of the money at your disposal requires constant awareness and strategic thinking.
In this post, we'll go over some of the basics of how to succeed in personal financial management in the times we live in.
The tips provided here will be of particular use to those just starting out with private income and/or investment, but they're worth reading for anyone concerned with his or her economic strategy.
What Personal Financial Management Entails
At a very basic level, personal financial management simply means gaining an understanding of your financial situation in order to make the most of your assets in day-to-day life and in planning for your future.
One thing to keep in mind is that assets might equate to more or less depending on where you live based on the cost of living concept. The cost of living is basically the amount of money necessary to cover basic living expenses such as food, housing, commuting, and even healthcare. Seeing as how the family home you live in or the Health Savings Account (HSA) you fund regularly fall under basic living expenses, the cost of living becomes significantly more important. To determine how favorable your city and/or state is, you can use a cost of living calculator and adjust accordingly.
But to many, all this really means is that you should watch what you spend and save what you're able to.
That certainly isn't a bad policy, but it's one that fails to address the complexity or full extent of strategic financial planning.
To gain a more appropriate basic understanding for all that is entailed in setting yourself up for financial success, here are 10 reasons why financial planning is important.
- Income. Analysing your income to know how much you'll have to put toward basic expenses, taxes, etc.
- Cash Flow. Managing spending and planning ahead to make the most of your income.
- Capital. Having leftover cash as a result of managing cash flow.
- Family Security. Understanding the need to address providing for and keeping your family safe (through insurance and other means).
- Investment. Making a plan to help your capital grow over time.
- Standard of Living. Guaranteeing the most possible comfort due to prudent financial planning.
- Financial Understanding. Making use of your own decisions and results to better understand what works in your financial management plan.
- Assets. Acquiring valuable assets (or investments) with low risk and limited liability.
- Savings. Having emergency cash on hand or stored in high liquidity investments.
- Ongoing Advice. Establishing a relationship with a financial planning expert to set yourself up for strong decision-making.
Some of these ideas involve the same specific types of financial management or strategy. However, understanding the significance of each of these points can help you to get a grasp of the full complexity of a sound financial blueprint.
Specifics of Personal Financial Management
Now we'll address some of the specific strategies that go into addressing these areas of importance.
Managing Income & Cash Flow
The first three points listed above fall under the same basic umbrella: having a thorough and detailed system by which you can track and understand your income and expenses allows you to get the most out of what you make, and ultimately gain capital that can be used to address other concerns and set you up for a financially stable future.
But how specifically should you track your finances?
It's not the most sophisticated financial planning advice you'll find, but for some it truly is as simple as keeping detailed records.
For example, by working out how much money you make each day (or week, or month if you prefer), as well as how much you spend in that same period - not just on daily expenses but in rent, on subscriptions, for insurance, etc. - you can very quickly paint a picture of what sort of financial trajectory you're on.
You can then adjust accordingly, perhaps cutting back expenses where possible to increase the amount of income that you actually get to keep (that is, that doesn't go immediately toward expenses).
Truthfully, this can all be done in a well-managed Excel sheet or something similar, but as is true of many personal productivity tasks these days, there are also apps and programs that can simplify the process.
The New York Times has done a write-up looking at a number of apps in this vein but, for many, Mint is the most popular option. Built with a sleek and attractive interface, this app makes notes of your paycheck deposits along with your daily expenses, and it has simple tools that can help you to create budgets (for example, it will tell you when you've used a given percentage of money allotted for groceries each month, etc.). It's not an entirely unique tool, as there are several apps with similar functionality, but it can give you an idea of how to use modern tools to better manage income and cash flow.
Managing Financial Security and Growth
A number of the other areas of importance listed above deal with financial security and growth in various forms: namely, insurance and investment.
These are areas you can only effectively look into once you've become sufficiently proficient at managing cash flow to gain some expendable capital to put into necessary insurance and strategic investment.
Insurance, for its part, is one area of financial investment in which there's often little wiggle room.
It's a nasty little reality that you simply need good insurance to protect yourself and your family from falling on hard times. And the truth is that it's difficult to develop an overarching strategy for managing insurance costs because different types of insurance (auto, home, health, life, etc.) involve different variables and considerations, and sometimes entirely different companies. But suffice it to say when forming a financial plan, insurance costs are as vital to factor in as regular expenses.
Financial investment, however, involves a great deal more in the way of strategic thinking and risk management. As mentioned previously, fostering growth and acquiring valuable assets are major components to personal financial management, and both can be accomplished through a strong understanding of how and when to invest.
Generally speaking, it's best to begin with a professional either managing your investments for you (which can be expensive but can also lower your risk significantly) or instructing you in the early going. But as with tracking income and expenses, there are also numerous modern tools that can help you to learn on your own how to invest strategically.
RobinHood allows you to make real investments in a somewhat carefree manner, with small accounts and no fees for transactions. Also, Wall Street Survivor even lets you use a stock market simulation game to get the hang of trading without putting any actual capital on the line.
Establishing Liquid Savings
Another very valuable point, with regard to investment, that some of the money you set aside for growth or savings should be readily available in the event of an emergency.
For many, this simply means maintaining a savings account with an "emergency" or "rainy day" fund. However, for others it simply means seeking out different types of investments meant for long-term growth and allows for quick transactions. Our page, Financial Contingency Planning has more on this.
Commodities like gold, silver, crude oil, and foreign currencies can all be traded with relative ease through private online sites, which gives them the valuable attribute of being accessible day and night. This is not to suggest that such investments don't carry risk—truthfully, they're every bit as risky as ordinary stock market transactions. Generally, however, these markets are less prone to dramatic changes, and the ability of investors to buy and sell in any amount at any time of day can make them appealing as liquid assets.
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In this article, I've attempted to outline the basic concerns of a responsible individual's approach to personal financial management, and a few strategies to consider in execution.
Ultimately, the most important step is to gain a thorough appreciation for what constitutes a complete financial plan. However, when you begin to implement the considerations in this article, it's also vital to remember that education should never stop when it comes to money management. Whether by reading up-to-date publications, consulting experts, or simply staying on top of any news and data relevant to your finances, it's vital to continue to learn and adapt.
About the Author
This is a guest post by Jenna Batten, a freelance writer by day with a strong interest in all things finance and investment.