Learn Personal Finance 101

As financial literacy is rarely – if ever – taught in schools, most of us enter the world of personal finance blind, having to teach ourselves how to look after our financial health.

Simply put, personal finance encompasses the whole picture of how you make, save, manage and invest your money while working towards your financial goals.

Here are six things you should do to control your financial situation and make your personal finance the best it can be.

1. Take the time to understand your finances.

Before you begin revamping your financial situation, it’s helpful to ascertain the state of your financial situation now.

A good way to do this is to look at all your financial incomings and outgoings over the course of a month, allowing you to gain an accurate view of your essential living expenses, discretionary purchases, ongoing subscriptions and other monthly payments, among any other components that make up the complete picture of your finances.

You can also use this time to identify where you can quickly reduce costs – and where you might be spending more than you need to – so that you can be more conscious of making similar needless purchases in the future.

2. Identify your savings goals.

There are many different savings goals that a single person might have – and that they may even be working towards at the same time.

Arguably the most important of these savings objectives is creating an emergency savings fund – in case of sudden car or home repairs that need completing, or you’re unexpectedly laid off or made redundant. For example, to give you a financial safety blanket and protect you from taking out loans and incurring needless debt.

Additionally, you may want to save for a deposit for a house, a new car, or your children’s education – whatever the case, understanding your saving objectives are essential to building the relevant budget.

3. Cultivate a budget.

Now that you have a fairly well-rounded picture of both your current financial situation and how you want your personal finance to look in the future, you can create a budget.

You can tailor your budget, taking into account the lifestyle you want to lead or the savings goals you want to achieve, or you can adhere to a pre-designed budget such as the 50/30/20 budgeting technique.

In this budget, 50% of your income goes to essential living expenses – such as rent, mortgage payments, bills, car payments, groceries etc. – while 30% is reserved for non-essential lifestyle purchases, and 20% is saved.

However, you may want to save more or less (though financial experts recommend 20% or more), and your living expenses may not account for 50% of your income, so you may want to ‘splash out’ more on the non-essentials, so you can adjust the budget to suit you.

Moreover, when budgeting, you should always ‘pay yourself first, ensuring that the amount you’ve decided to save is directed into your savings account before anything else.

4. Minimize and manage debt effectively.

Ideally, this would mean always spending less than you earn and ‘living below your means. 

However, sometimes incurring debt is unavoidable. Sometimes, it can even be beneficial for the long term, such as student debt acquired from pursuing higher education (which may help launch a lucrative career). At the same time, mortgages allow for the acquisition of both a financial asset and a home.

So, if you do have debt, you should be working towards paying it off as soon as possible – without going so far as to compromise on your most important savings goals – prioritizing your highest interest debt first.

5. Use a credit card the right way.

Though credit cards are often vehicles of debt accumulation when misused, they are also an invaluable tool to improve your credit score, which is likely to help you financially in the future.

Suppose you want to take out a mortgage or take out a lease on a commercial property. In that case, you’ll need a good credit report, which can be improved by reliably paying off your credit card each month on time – setting up direct debts when possible to reduce the risk of late/missed payments.

6. Invest.

More than staying aware of your financial situation, saving your money, and paying off debt, one of the best things you can do for your personal finance is investing your money and growing your wealth. There are numerous avenues you can take to help you achieve this.

To invest and grow money for your retirement, you might direct part of your income into a pension scheme. Or, if your employer doesn’t provide this option, you could start a private Pension/retirement savings plan, through which you can choose to invest in stocks, bonds, ETFs or mutual funds with minimal effort and steady returns.

Likewise, you may choose to invest in stocks or funds to grow your wealth for use before your retirement, opting to employ an investment strategy to suit you and maximize the success of your investment.