How to Understand Personal Finance Basics

Getting a handle of managing your basic personal finance administration can return many financial rewards as well as provide you with more free time to pursue your interests and freed up money to invest. When we talk about the basic elements of anyone’s personal finances we are including a personal budget, savings and investment planning, managing your income and outgoings resourcefully as well as applying for loans and finance and various insurance policies you may need over your lifespan.

There are 5 key elements of good financial management to follow:

Steps

1. Budget. Working without a budget usually leaves you mystified as your paycheck seems to disappear; leaving you empty-handed by the time the end of the month rolls around and it’s time to pay the bills or put food on the table. In addition, when you create a budget, you begin to see a clear picture of how much money you have, what you spend it on, and how much, if any is left over.

2. Invest. To be more efficient in dealing with personal finance basics, it is important to choose wisely when and how to invest your savings. Put your money to work earning interest in a savings account or returns in a retirement fund or a mutual or index fund or build equity in your home by paying down your mortgage. Better yet, increase your assets by investing in a few of these options, while keeping a liquid savings account for emergencies. Failing to take advantage of free money is a common personal finance mistake amounting in money lost to inflation and missed opportunity. Be cautious also of investments that promise a high return with little or no risk.

Here are a few common types of investments:

  • Secure Deposit savings. The no-risk options listed from worst rate to best rate.
    • Bonds. Premium Bonds can go up but usually stay the same.
    • Basic Bank Account. Worst rate of return.
    • Current Account. Better rate of return than Basic Bank Account.
    • Standard Savings Account. Better rate of return than Current Account.
    • Regular Savings Account. Better rate of return than Standard Savings Account.
    • ISA. Better rate of return than Regular Savings Account.
  • Risky investments than can go up and down.
    • Property.
    • Unit trusts.
    • Stocks and shares.
    • Other assets.
3. Practice Debt Management. After creating a sound budget and cutting unnecessary expenses, you may still find yourself with remaining debt to get rid of. Mismanaging your debt through overspending, failing to budget or high interest rates can quickly send you in a downward spiral. The best way to handle debt is to stay out of it in the first place. Remember to stay away from temptation to “buy now, pay later” and only take loans for the essentials in life: education, transportation and habitation. As a general rule, do not finance anything for longer than its useful life. Keep your credit score high by keeping tabs on your credit report and paying your bills on time.

4. Get Insurance. You’ve definitely come a long way; there is one more important aspect of your finances that you need to consider. You’ve worked hard to build a firm financial footing for you and your family, so it needs to be protected. Accidents and disasters can and do happen and if you aren’t effectively insured it could leave you in financial ruin. Quality insurance can protect your life, your ability to earn income, and to keep a roof over your head.

5. Avoid scams.

  • Gambling.
  • Pyramid schemes.
  • Ponzi schemes.

Tips

  • Personal finance basics relates to analyzing your present financial status, setting financial short-term and long-term goals, setting up the execution for these goals, executing the goals and monitoring the growth, and reassessing the achievements and making compulsory adjustments for a rewarding result.
  • Master the 5 essentials of personal finance basics because your dream of a successful life depends on it.
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This entry was posted on Friday, November 25th, 2011 at 12:47 am and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.