For many of us, personal finance is spooky, but eventually, you’ll have to face the music and think about it, so you may as well do it now. Personal finance is necessary when things are good and even more important when things are tight.
Even if things aren’t tight, you could be taking steps to maximize your money. When you’re a young adult starting on your own or managing your finances for the first time, it is a good idea to have control over your cash.
The financial decisions are now up to you. However, no matter your age or stage of life, there are benefits of personal finance you’ll be grateful you took advantage of.
What is Personal Finance?
Personal finance is an umbrella term for all factors involved in managing your money that contribute to your overall financial health.
Managing money and learning to create and stick to a budget is a big part of personal finance. Another aspect is keeping track of your money, income, spending, expenses, and investments. Resolving spending and income habits to reach your financial goals is essential.
Definitions to Know
Of course, nothing important is allowed to be simple. So, here are some terms that you will need to learn and understand.
Net and Gross Income
Net income matters because it’s the amount of money you will have available for you to use. Net income is your paycheck after all the deductions, such as taxes and social security, are taken out.
Your gross income is the amount of money you have before taxes and deductions. Your gross income determines the subtracted percentage for these deductions.
Spending and Expenses
Spending is pretty self-explanatory. It is the amount of money that you spend.
Expenses are the purchased items that you absolutely need. They include necessities such as rent, utilities, and groceries.
Now it starts to get a little trickier. Investments are anything you put money into now that will return you more later.
By buying stocks and bonds with a high likelihood of value increase, you can sell them for more than you bought them for.
You can buy stocks and shares of companies. If the company makes more money, its stock becomes worth more too.
The government or other corporations issue bonds in exchange for “loans” from individual people. Essentially, you’re loaning them money, and they’ll pay you back with interest.
There are various other ways to invest, such as opening retirement accounts or purchasing a house or other assets. Many people use investments to provide “passive income” streams in addition to the money they make from working.
Equity is the cash value of your assets. For many people, their house has equity if they own it. A home’s equity is the property’s value minus its owed mortgage.
In terms of finances, protection is the steps you take to preserve your wealth in case of an accident. Sometimes, life happens, and while it may not be fun to entertain the idea that something could happen to you, a family member, or an important possession, it is necessary to have a plan in place just in case.
This planning and safety net includes insurance (all types), savings and investing accounts, savings for retirement, and estate planning.
Benefits of Personal Finance
No matter how hard we wish, we don’t live in a world without money, so we can’t live without money. Setting yourself up for success monetarily opens up more doors for you later in life. I imagine you don’t want to work forever, and you might be unable to even if you did. Someday, you want to retire. Right?
Healthy personal finance habits allow you to keep track of your money and help you achieve those short and long-term financial and life goals.
How to Manage Your Finances
Now that you know how important finances are, how do you manage them to reach your goals?
Create a Budget
Budgeting is important because it lets you see everything in front of you. It shows you where, what, and how much money you spend. Plus, it helps you avoid spending money you do not have (or do not have allotted for that particular purpose), allows you to save and gives your money a purpose.
There are so many resources on learning how to budget and a plethora of apps to do it with ease.
What are your money goals? More than that, what are your life goals? There’s a good chance that many of your dreams in life will require money. So, why is personal finance essential?
Do you have debt or student loans you want to pay off? Do you want to buy a house someday? You may want to fill that house with some kids of your own. These ventures highlight the importance of personal finance planning because they demand money, requiring good financial education, planning, and health.
Having tangible goals and tangible ways to track those goals makes it easier to achieve them and keep your finances in check.
Learn as Much as You Can
There is so much more financial knowledge to gain; this blog just scratched the surface. There are many different avenues within personal finance you can go deep into learning about, such as investing or buying a house. Still, even basic knowledge can help you in getting started.
Like any new skill, learning financial literacy isn’t done overnight. It takes time, knowledge, and practice. Thankfully, the Regional Economic Development Center (REDC) can help with your personal finance education.
The affordable Personal Finance course through REDC can further teach you personal finance necessities and familiarize you with how best to start, or continue, your financial journey. No matter your age or financial situation, understanding money management, credit score, investing, and how to be intentional with your finances will benefit you for the rest of your life.