The truth is that earning a high income can make you financially independent in less time. However, you can also achieve this goal even with average income levels. Many people worldwide have done it before!
“All you need to do” is to understand the importance of personal finance activities and do proper financial planning with your money.
Why is personal finance important? 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 the daily activities that we forget how crucial it is.
This article will try to answer just this question. We must understand the reasons why we must manage and plan for our money at every step of life.
Without personal finance, it possible to live a life of bondage without knowing how to get off debts or adequately pay for your bills.
When seeking financial freedom, personal finance plays a significant role. Therefore, 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 financially, 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.
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 of 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, and more.
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 and caters for both long and short term financial goals. Whether you have enough money for your essential monthly bills or you want to plan for your retirement, this is all personal finance.
Being financially literate helps a person to distinguish between financial decisions that will be beneficial, and that will be detrimental to 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.
The sooner someone starts to plan their finances, the better. To ensure all your assets, your income and expenditure are catered for, and you can use useful tools such as personal capital that will cost you nothing.
I use Personal Capital to track all my investments as well as cash flow from side hustles for free.
Money speaks one language. If you save me today, I’ll save you tomorrow.
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
What we must understand is that money issues go beyond what most of us think about. We should think of our finances in 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? Well, this shouldn’t be the case.
We should have a plan that establishes how much our income is, what are our expenses, what plans we have, as well as our financial future 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.
When you possess the proper personal financial knowledge and skills, it gives you an advantage when facing financial challenges, opportunities, and responsibilities that will come your way.
2. Easily Manage Your Income
If you don’t plan for your income, you will end up overspending or spending on unnecessary items. 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.
Being able to manage your income will help you to know which expenses to handle first and which ones come later. Also, you can effectively know how much is necessary for tax payments, savings, or clear your monthly bills.
I like using a tool like Trim for completely free, which will automatically analyze my bank accounts to determine where I should “trim” expenses.
Think of Trim as a personal assistant that will find subscriptions, high cable bills and more to find opportunities for you to save money.
Read Also: What Is The Meaning Of Business Finance
3. Budgeting, Spending, and Saving
Even if you earn a $200,000 salary every month, you can still be living in huge debts 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 state 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, what are your monthly expenses, and help 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 that you otherwise would have ignored.
For example, you can avoid moving to a luxurious neighborhood to fit in a friends club, by referring to your budget and checking if that is in your list.
If your income doesn’t allow, or you had 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 grocery, as well as the longer-term goals like saving and investments.
Read Also: Essential Guide To business process Mapping
As Dave Ramsey said, “Don’t spend more than you earn!”
Budgeting is a bit easier now with a variety of easy cashback apps that will give you money back simply by shopping at stores you love. Here are some of my favorite:
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 be able to increase your cash flows.
Thing helps 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.
You can use Personal Capital to track your cash flow and net worth on auto-pilot and completely free.
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 make sure that they earn enough money that can offer them a sense of security.
If you want to have financial freedom and have a sense of financial security, then you must plan for your finances.
If you have the right insurance policy, you have invested, and make a proper saving, it helps to offer peace of mind both for you and your family.
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 towards budgeting and provides better control over your finances.
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 be able to manage one’s debts in a way that guarantees no harm is done to your futures 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 debts is to avoid overspending or spending more than what you are earning.
For example, most people tend to change their lifestyle when they have an increase in income, but in a higher proportion than their income increase. This only leads to getting into more debts.
Also, when you overuse your credit card, it means that 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.
8. Growing Your Assets
Owning assets as a form of the 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 only possible through personal finance.
This way, you will be able to grow your assets, being sure that they will not turn out to be a financial burden in the future.
Side hustles can have an instant impact on your finances. Even small wins like signing up for Swagbucks and taking small surveys for cash can help you chip away at unnecessary debt.
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.
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 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.