What is personal finance and why does it matter?
Personal finance is about managing your income according to your financial situation and creating a budget for how you spend and save your money.
Personal finance involves evaluating your income, your financial needs, and your expenses and allocating your money accordingly.
Keeping track of your income and how you save and spend your money is called budgeting.
Managing your money can help you live a self-determined and secure life.
What is personal finance?
Personal finance is about managing your money to meet your personal financial goals. It involves evaluating your income (the money you earn on a regular basis), your recurring expenses (like rent or insurance payments), and how much you want to save or want to invest.
A financial goal could be something big like planning for your retirement fund or saving up for a car, or it could be something smaller, like saving 50 euros every month or buying your first stock. Personal finance is exactly that: personal. The first step is figuring out what you want to achieve. Then you can calculate how much money you’ll need to allocate each month to achieve that goal.
That said, personal finance is not a one-and-done deal. Keeping track of your finances is a lifelong practice. As we evolve as people, our financial needs and circumstances might change as well. So it’s a good idea to re-evaluate your personal finance goals every few years and adjust where needed.
Why does personal finance matter?
Studies have indicated that personal finances are among the main causes of stress for adults. Worrying about upcoming expenses, going into debt or even stressing about losing your job can cause anxiety, depression and insomnia, all of which take their toll on your mental health. Tackling one’s personal finances head-on and creating a clear overview and a game plan can help to curb those worries and make you feel more stable.
In that sense, managing your money is a building block towards living a self-determined and secure life. From something as insignificant as buying your morning coffee to a life-changing step like taking out a mortgage, we are faced with financial decisions every single day. Therefore, it is important to learn money management skills as soon as possible and to regularly analyse your personal finances.
How can I start managing my money?
Budgeting is the key to managing your money. The basic idea behind budgeting is to make sure you don’t spend more money than you earn. You can achieve this by creating a structured plan that takes into account all of your income streams and then calculates how that money is paid out in terms of (1) expenses, (2) savings and (3) investing. A budget also includes having an emergency fund that you can tap into in case of unforeseen circumstances.
Why is budgeting so important?
Budgeting is an easy and practical way to keep track of your finances while pursuing your long-term financial goals. It can show you where you might need to control your spending habits, especially if you tend to make impulse purchases or are a fan of retail therapy. Having a budget in place allows you to make better choices and, in return, worry less about overspending and debt. A budget is useful no matter your financial means. Remember: It is not about how much you earn but rather how much you save and invest.
How to start budgeting
There are several ways to keep track of your budget, depending on your preference. If you want to keep it old school, then a notebook is an easy way to get started. Just write out your monthly income and recurring expenses and keep track of all your spending and receipts.
If you want to go a little bit more high-tech then you can set up a digital spreadsheet in Excel or Google Sheets. Software providers often have a ready-made template you can just plug your numbers in.
If you want to streamline your experience then you might want to consider using a budgeting app on your smart device. There are plenty to choose from and some banks even offer budgeting help within their apps.
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What are some budgeting techniques?
One of the most common and effective budgeting techniques is the 50 - 30 - 20 rule. Let’s break it down: 50% of your monthly income should go towards necessities such as housing (rent or mortgage), bills (like utilities) and groceries. 20% should go to your savings, your emergency fund and/or investing. Lastly, 30% of your income should be allocated towards non-essentials - things you want but that you don’t need, like clothes, concert tickets or going out to a restaurant or bar.
There are variations to this percentage rule and you can fine tune it depending on your income or preferences. For example, you could save less if you do not earn enough to save 20%. Or you could crank up your savings to 30%, 40% or even 50% if your income allows it.
The bottom line is that your budget, just like your overall finances, is unique to you. Any plan you create should be realistic, achievable and reflect who you are and what you want to achieve. Remember: managing your personal finances is a lifelong process, so make sure it works for you.
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