We always believe we have a good idea of how much money we’re spending and saving. More often, we believe we save more than what we spend. But when the day comes when there’s an urgent need for money, we find ourselves wanting and end up borrowing money.
Managing your finances is the key to avoid this scenario, and personal finance management skills are very necessary.
Personal finance management is a finance plan- how much will you invest, spend, save, and budget over time. Having a plan on how you’re going to pay your debts, use your credit cards, pay the mortgage, etc., will aid you in understanding your financial spending patterns. It will help you save money in the long run.
Your financial plan or budget plan will help you gain an understanding of money and its workings. It no longer becomes a mere medium of exchange; it gets value when you decide to save it and use it well. Financial literacy is a necessity in today’s world, and learning how to organize your wealth will save you a lot of trouble later.
From where does it begin?
Understanding your various income sources is the first step towards drawing up your financial plan. The various sources of your personal finance will include but aren’t limited to:
- Extra time wages
These will serve as the capital you invest, spend, save, and budget. List down all your sources and how much money you earn from each of these.
The second step would be to observe your spending pattern. Make a monthly list of your purchases, investments, and so on. You’ll notice a pattern for your spending and savings. Discerning this can help you in saving and budgeting your money towards where it’s needed.
The third step is to budget. Draw up a financial plan on how and where you’re going to spend your money. Make sure to give priority where it’s needed. Earmark percentages of money for clothes, food, and other essentials. For this, the 50/30/20 plan works best as it considers essential expenditures as well as miscellaneous ones.
The fourth step would be to create an emergency fund. It is precisely for this reason why a personal financial plan is created: to make sure you never run out of money. Set money aside for hospital visits, any repairs to be made, and so on. Earmark this amount percentage-wise, and keep adding that amount to the fund every month. Rest assured, you’re financially covered if you’ll ever need it.
Once you’ve established a plan of action, it is up to you to implement it properly. In case you feel like you need more information, search for financial literacy videos and classes online. Most of them are free and easily available. Listen to podcasts, read online blogs, and go to the local library if necessary. By learning to spend wisely, you will increase your savings, and in doing so, earn financial freedom. Good luck!