Understanding personal finance and budgeting
If you're one of the many Americans who are struggling with money after the great recession, you might be considering getting better at managing your finances. In this post, we'll go through how to understand personal finance and budgeting so that you can start earning more and living a less stressful life.
The Basics: How are they different?
Personal finance is the practice of ensuring that your income is maximized through saving and spending, investing wisely, and eliminating wasteful expenditures. This will lead to an improved financial position overall.
Financial planning is the process of managing a household's assets so as to provide a steady income in retirement or in case of emergency, while leaving enough assets for one's heirs.
It is important to note that personal finance and financial planning are NOT the same thing. Personal finance is about making sure you build a better financial portfolio while paying off your debt on time and staying out of court, while financial planning is about making sure you have enough money to keep you afloat in retirement or for an emergency.
Many people have a hard time understanding the difference between these two terms. It can often seem like a wall of abstraction, which can make it difficult to accomplish your desired financial outcomes. Basic financial literacy will get you far in understanding these concepts: Credit and Debt Cards: These are the most common forms of debt in personal finance. You should be vigilant about not taking on too many of them at once, as they are frequently expensive. Investments: From buying stocks to bonds and money market funds, there is a variety and type of investment that you can choose. Bonds are safer investments than stocks because they are insured by the US government through various companies (e.g. Fidelity, Vanguard). Mutual funds: These are a very common type of investment. They are basically portfolios made up of a variety of stocks and other assets that you can buy. They often allow you to invest in investments without paying high fees for them (i.e. iShares, Vanguard). Insurance: This is in case something catastrophic happens to you or your family; it should be taken out in advance of when you need it so that you don't hit these events with no insurance available (i.e. P&C policies, life insurance). Real Estate: Whether buying your first house or selling your old one, real estate can be a big expense for many people. Your mortgage broker can be invaluable in this process (e.g. Wells Fargo, CitiMortgage). Taxes: One of the most difficult issues to handle in personal finance is taxes. This is especially true for people who are self-employed or have a complicated tax situation (i.e. H&R Block, CPA's).
Personal Finance Advice: Achieving Financial Independence
If you want to be financially independent and not have to work later in life, then here are some pointers to follow from experts and personal finance bloggers: Establish an emergency fund : This will ensure that if you lose your job or get sick that you'll have some money to get by on until the next paycheck arrives. Save up 3 to 6 months of living expenses and then put it in a safety deposit box or bury it in the back yard. Keep your eye on the prize: Never forget your goals and what you're working for. If you get carried away with some short-term spending, then you could lose sight of what's important, which is to build up your savings so that you'll have a better life in the future. Don't spend money on every whim and temptation: If you think something will be worth it later because of how great it makes you feel in the moment, then chances are that in 10 minutes time, when those feelings have faded away, you'll regret having spent that money on something that gave such an ephemeral pleasure. Pay off your credit card bills: The interest rate on your credit cards is probably very high, so pay those bills off as quickly as possible with money that you can spare. This will save you money in the long haul. Make working hard a way of life: Most people don't reach financial independence because they're lazy and don't work hard at what they do for a living. You should always be looking for ways to improve yourself and your marketable skills so that you can earn more money and build more savings.
Don't have any credit cards : Many people have had a difficult time financially in the past because of their use of credit cards. It's best to avoid using credit cards altogether for this reason. A lot of people get themselves into trouble because they take on a new credit card after they had paid off the ones that they already had. Pay off your debt in full and on time: This is another great way to save money. It doesn't matter how much you owe, just get yourself out of debt as soon as possible. Minimize your interest expense: Many people have a difficult time living cheaply because their debts are so high, but if you can pay them off quickly with the money that you're saving, then you'll be able to afford more things for yourself and your family (e.g. cars/hotels/vacations). Be frugal: There are various ways in which you can save money that don't involve cutting corners or going without. Spend on necessities first (i.e. food), then on discretionary items (i.e. clothes, entertainment). This will cut down on your expenditures while still allowing you to enjoy life.
Financial Planning Advice: Financial Independence through Retirement
There are several different ways in which one can build a desirable retirement portfolio, depending on their situation and assets available to them: Create an emergency fund : You should have enough money saved up for an emergency in case of job loss or health problem such as cancer or heart attack. Set reasonable expectations: It's very important to know what you can expect from your investments, which can be done by finding out the historical investment returns of the various investments that you have available to you. Education is very important: This will allow you to learn more about investing and personal finance in general. These lessons will primarily come from reading books and articles that are written by experts in these fields, but also from learning from friends, family members, or accountants who have more experience in these areas. Be wise: Many people are taken advantage of when they buy into certain financial products because they don't know any better or the person who is selling it to them isn't giving them good advice. Learn about the different financial products for yourself to make educated decisions about what's best for you and your family.
Financial Planning Advice: Creating Your Portfolio and Retirement Plans
There are many different ways in which one can set up their portfolio and retirement plans, depending on their situation and preferred method of investing: Invest in low-cost index funds : This advice comes from experts such as Mr. Money Mustache who is a very strong advocate for this kind of investing. This kind of strategy will allow you to achieve remarkable returns over time with very little stress involved (i.e. Vanguard).
Conclusion
Financial planning can be a very stressful undertaking. However, the best thing that you can do is to become more knowledgeable about what's going on in the financial markets and how to manage your finances. The more you know about personal finance, the less likely it is that you'll end up in financial trouble. Once again, it's not possible to teach someone everything that they need to know about personal finance at once, as this would take a lifetime of learning. Hopefully this short article will help people get started on their own path towards financial independence. Also, we hope that it will give them the tools and knowledge necessary to succeed in reaching their goals over time.
Sources
* http://moneycrashers.