We all wish to live a life free from financial worries, don’t we? In our busy lives, personal and financial management can seem like a tough task. People begin optimistically but end up facing challenges due to a lack of financial literacy. Many in our country suffer from financial woes, living beyond their means, paycheck to paycheck, under debt, or by making great sacrifices. A lot of the time the problem isn’t income, but how one manages it. In recent years consumerism has also risen. We are constantly barraged with ads and are coerced to impulsively spend. The ease with which one can get loans also means many find themselves stuck in the vicious cycle of debt.
Many factors like these can lead to poor financial health, but with solid personal financial management, one can work their way towards financial fitness. In this blog, let’s take a look at what personal financial management is, its various aspects, its importance, and finally some tips on how to successfully manage your finances.
What Is Personal Financial Management (PFM)?
Put simply, personal financial management is the art of handling one’s financial resources. It covers different components such as budgeting, saving, investing, debt management and so on. How one manages their money determines their quality of life, how likely they are to reach their financial goals, and how secure their financial future will be. Personal financial management is how one manages money on a day-to-day basis, which ultimately shapes the broader trajectory of one’s economic well-being. Whether your plan is to go on a dream vacation, buy a home, or simply enjoy a stress-free retirement, financial planning plays an important role in achieving these goals.
Key Aspects of Personal Finance Management
There are four major aspects of personal finance management – budgeting, savings, investing, and debt management.
A budget is an outline you create for your income and expenses, but before you can make one you have to assess your financial situation and set financial goals. Set clear and attainable goals and budget accordingly. Broadly speaking, your budget should have three categories – essential expenses, non-essential expenses, and savings. Essential expenses contain expenses such as a mortgage, rent, groceries, and electricity bills, while non-essential expenses are what you spend on recreation and leisure such as streaming subscriptions and hobbies. This category will help you easily identify areas where you can make cutbacks. The third category, savings, is one that you should prioritise.
According to the general guideline, one should aim to allocate 50% of their income in essential expenses, 30% in non-essential expenses, and 20% in savings. This allocation should however reflect your goals. For example, if your goal is to create an emergency fund quickly, you might increase the allocation of your savings to 25% by making cuts in the non-essential expenses.
Sticking to your budget will ensure that you live within your means, but often it is considered the hardest part of the process. It takes discipline and commitment to stick to the budget, this is why it’s important to be realistic. If you make too many cutbacks and set unattainable goals, you might get frustrated, feel demotivated and ultimately abandon your budget.
There are different reasons for which one might save money such as for retirement, building an emergency fund, or investing. The amount of money you should have in a regular savings account also matters. If you have too much money sitting idly in your savings account, its purchasing power is likely going to erode due to inflation. Emergency savings should generally have three to six months of your living expenses in a high-yielding liquid account. Because emergencies are unexpected, not being prepared for them can cost you big.
The lack of an emergency fund can derail the progress you make toward your financial goals as you might have to prematurely end your investments or have to take debt. In the words of Warren Buffet, “Do not save what is left after spending, but spend what is left after saving.” When you receive your monthly income you aim to set aside an appropriate amount in your savings account. Try to make this a habit by starting slow and with time when you see your savings grow, it’ll give you peace of mind knowing you have something to fall back on.
Investing is when you make your money work for you. As said in the previous section, having money sit idle is unwise because inflation can erode its value. This is why investing your money is important – it not only creates wealth but also preserves the worth of the money you have. Most investment options offer returns that beat the rate of inflation. Different investment options, such as stocks, bonds, mutual funds, real estate, and gold have different degrees of financial risk associated with them.
For example, stocks are riskier than government bonds. This is because the value of stocks can fluctuate based on market conditions while government bonds are considered more conservative investments that provide a fixed interest rate. Options that come with higher risk also often offer high returns, so before you jump into the world of investments, it’s important that you assess your risk appetite along with your financial goals to make sure that your investments align with them.
Debts are a reality for many of us and often people think they can’t adopt good personal finance habits because of the liabilities on their heads. But that reasoning is flawed. How you manage your debt is a major aspect of personal financial management. Many who are successful at managing their finances effectively were or are in debt. What makes them successful is their commitment to getting rid of their liabilities as soon as they possibly can and securing financial freedom.
How you repay your debt also depends on you. There are various strategies you can adopt, such as paying off the smallest debt first which can give you confidence and motivation to jump to the next, or paying off the biggest first as that means you’ll be saving more interest in the long run.
Your debt repayment strategy depends on your preferences. You should prioritise any credit card loan you might have as that can hurt your credit score. Make sure to look at your budget when you’re forming a repayment strategy to identify expenses you can cut. Reallocate and have a portion dedicated to debt repayment, use up the saving portion if you have to but try to be free of the burden of debt as soon as you can.
Another important thing is to stay debt-free. Avoid unnecessary and impulsive purchases with your credit card and stay within your means. Debt can be a massive source of stress, but effective debt management can liberate you from its suffocating grip.
Importance of Personal Financial Management
Lacking personal financial management means your financial path is unclear. Your financial goals tell you where you need to go, but personal finance management tells you how to get there. Here are some reasons why personal financial management is crucial:
- Whatever your financial goal – funding your child’s education, buying a house, or a comfortable retirement, personal finance management helps you achieve them.
- It can help you build good habits like regularly saving money, budgeting, and monitoring progress while kicking some bad ones like accumulating debt or making unnecessary purchases.
- Good PFM makes sure that you use your resources efficiently.
- It provides a safety net by making sure that you have enough resources to weather unexpected storms such as medical emergencies or job loss.
- If you manage your finances well, not only will you free yourself from any debts, but also avoid taking needless debts in the future.
- By investing, PFM helps you build wealth over time and creates a solid foundation for your future and that of your family.
- Good management also spares you a lot of stress and anxiety that money troubles bring and improves your quality of life.
With effective personal finance management not only will you enjoy a comfortable today, but also a secure tomorrow.
Tips for Successful Personal Financial Management
Here are some strategies for successful personal finance management –
- Before anything, assess your current financial situation – your income, expenses, assets, and liabilities to get an overview.
- Set attainable goals. Unrealistic goals can lead to disappointment and demotivate you. Make sure to clearly specify them, and give yourself a realistic timeframe to achieve them.
- Similar to goals, make sure your budget is realistic. An unrealistic budget is hard to stick to and can negatively impact your quality of life.
- Build an emergency fund with at least three to six months’ worth of living expenses in an easily accessible account.
- Explore different options to repay your debt such as debt consolidation. Prioritise high-interest debt so you can save more in the long run.
- Avoid taking unnecessary debt. It’s easier today than ever to get some quick loans but indebting yourself without careful consideration can lead to long-term financial stress.
- Monitor and improve your credit score. A good credit score means a higher credit limit and low interest rates.
- Diversify your investments by investing in a mix of assets to reduce overall risk.
- Regularly review and readjust your portfolio as conditions change.
- Consider the tax implications of your investments. Many options such as ELSS and PPF come with tax benefits, so if your goal is to reduce your tax liability, look into such avenues.
- Develop habits to improve your financial literacy, such as watching finance news, reading articles, and listening to podcasts. This will take some time to build but keep at it. Your decision-making will improve as you increase your knowledge.
- Make sure you have comprehensive insurance coverage which includes life, health, and property insurance. Having good policies becomes especially important if you are the main earner of your family. You never know what life has planned for you so it’s important to stay prepared and safeguard your loved ones.
- Because personal finance management is a complex task, it can seem daunting, especially to beginners. Don’t hesitate to seek advice from a financial management consultant who can help you with the various aspects of PFM and help you secure your future.
Also Read: Profit Maximisation in Financial Management
Every person partakes in personal and financial management. What separates the successful from the unsuccessful is their ability to make informed financial decisions, practise disciplined saving and spending habits, and adapt to changing financial circumstances. By educating yourself about the aspects and the importance of PFM you have taken the first steps towards success. Remember, that you won’t be efficient at managing your money overnight, it’ll take time and discipline to build the skills and habits you need to be successful.
The tips in this blog can help you go a long way, but to get a clearer view of your personal financial situation, consider consulting with a professional. A certified financial planner can help you by making a personalised plan that takes into account your unique situation, history, goals, and risk tolerance. With a good management strategy, not only can you secure your present but also pave the way for a fulfilling future.