Why is personal finance important? Do you ever wonder how do we use finance in our personal lives or what is personal finance?
In the current economic climate, it’s impossible not to think – and worry – about money on a regular basis.
We all like to think that money isn’t the be-all and end-all of everything, but in reality, we can’t get by without it.
But how do you keep on top of your finances?
It can often be an ongoing battle with your mind, trying to plan for the future and arguing that “you can’t take it with you”.
But what about the loved ones that you’ll one day leave behind? You don’t want to leave them with nothing, right?
In order to make the most of every penny and still live a fulfilling and happy life, we’ve pulled together our top tips on how to be more financially stable.
So what is personal finance and how can you manage your money better?
Let’s take a look.
What is Personal Finance?
Personal finance is a term that covers managing your money as well as saving and investing.
It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning.
The sooner that someone starts to better manage their money, the better.
When you are financially stable, you are confident and are in control of your financial situation and financial goals. Financial security is that calm and reassuring peace of mind you feel when you don't have to worry about your income matching your expenses.
It can also mean that you have enough money saved up for any emergencies and your average net worth is on par with your peers.
Generally, financially stable people don't have looming debt and have enough money saved up for future goals. It's important to note that financially stable people aren't necessarily rich, they are just living within their means and their finances are in order.
Why is Personal Finance Important?
No one is expecting you to know everything about personal finance right away. It is better to ask a few common questions than to end up in severe debt.
Go exploring on the internet and learn about different savings accounts, the best ways to invest, and how to tackle debt.
Ask for better options if fees seem too high. Talk to parents, grandparents, or other financial mentors in your life. If you are totally lost, start working with a financial advisor to help you get started.
A good way to start to learn about why personal finance is essential is reading the list below.
Ensures That You Meet Your Money Needs
Many people are living paycheck to paycheck. Americans may think that saving is impossible with student loan debt and credit card debt.
Unfortunately, many people procrastinate on saving and find themselves in their 40’s with nothing in their savings. You should check out the average net worth by age and see how you stack up.
Next, you can start by simply opening a savings account, even if you only save 5% of your monthly income, it can help. Look for one that does not require a minimum deposit and has minimal fees.
You don't need to have large monthly contributions to get in the habit of saving money. Put in what you can each month even if this means giving up a morning coffee one day out of the week.
Easily Manage Your Income
Personal finance is also essential because it eases the burden of overspending your income.
If you don't properly manage your income, it can be easy to overspend and purchase things that you can't afford.
When you are busy running around with work or school, it is easy to spend money that’s not accounted for. If you aren't money-savvy about the costs of eating out, filling the gas tank, and stopping in for a haircut, you can easily get into the habit of overspending.
Start by seeing where your money is going by using budgeting tools. Most people are surprised to find out how much money is wasted on everyday expenses. These add up faster than you think.
Budgeting, Spending, and Saving
It can be difficult to get a budget under control. Even those that end up being savvy savers had to start somewhere.
Finances are like anything else, you must learn how to handle them. There are some specific challenges that come with millennial monetary habits.
The issues arise more from lack of knowledge than lack of ability.
With a little education and practice, this generation can prepare for the future as well as their grandparents did and stop making money complicated.
Even if you are making over six-figures, if you aren't budgeting and saving wisely you can still be in a ton of debt if you don't live within your means.
Take some time to sit down and figure out exactly what your income and expenses are each month.
Make sure you’re aware of every direct debit and credit that comes out of your financial accounts and work out exactly how much disposable income you need to get by each month.
Put everything down in a free budgeting app so that you can easily keep track where every cent of your income is going.
Personal Finance and Cash Flow
Personal finance is crucial because it'll help you accurately predict your cash flows and know where your money has gone and will be going.
Just remember that every penny counts.
Most larger transactions happen online or while using your debit or credit card, few people carry cash around with them these days.
However, get yourself a money box that can’t be opened without smashing it once it’s full and you can save $1378 with the 52-week savings challenge.
You’ll be amazed at how quickly it adds up, and if you invest that money you will benefit from the power of compound interest.
It pays to start saving every little penny.
Offering Family Security
The ultimate goal for any family is financial security and the peace of mind it'll bring. As you saw in the recent COVID-19 pandemic, many people lost their job and had to rely on unemployment.
This can be a huge burden for any family. To chalk it up, many people tend to estimate their budget in their heads and don't actually use financial planning tools or try to build an emergency fund.
It’s all well and good living within your means, but it’s important not to live right on the edge of your financial limit. It’s a lovely idea to be saving for something like a big holiday or a new car, but you need to always try to keep some money aside for the not-so-nice things such as a family emergency, an unexpected vet bill or an unforeseen issue with your home.
When checks were the norm, kids were taught to manage a checkbook as soon as they got their first job. Everything was exact, but in the modern era, you can track your expenses with apps and financial tools that are free and simple to use. This attention to detail helps you budget your family budget its money and can help you plan for your retirement.
Offers Better Financial Understanding
By being keen on your personal finance skills, you can have a better understanding on money and how it can affect your entire life. Most people don't even know their own credit score.
Even if you do not have a lot of credit lines, it is important to get in the habit of checking your credit score.
Get a free monitoring app like Credit Sesame to get an idea of what is going on and to get alerts when things change on your credit report.
Credit Sesame provides tons of free financial tools and reports to help members better understand their financial health and how to improve it. Using Credit Sesame is safe — it doesn't hurt your credit score and does not require a credit card for its free membership option.
The most accurate information, however, is going to come from your true credit report. You can order this for free once a year.
It is important to understand how each aspect of the algorithm affects your final score and how this affects your ability to get lower interest rates on auto loans, mortgages, and credit cards. It is important to start early when you are planning for your financial future.
Keeps You Off Unmanageable Debts
Even the most renowned financial genius can make financial mistakes. Even if you're already facing financial difficulties, steering clear of financial mistakes could be the key to survival. With how easy it is to rack up credit card debt and incur overdraft fees your money can be at risk.
That's why knowing the importance of personal finance is so crucial, because it can really affect your life and happiness. It can be all too tempting to get another credit card or loan whenever the going gets a little bit tough, but it’s best to avoid that at all costs.
Even things such as leasing a car instead of buying one outright can come back to bite you in the end. Put proper plans in place to guarantee you never get to a point where you’re relying on high-interest loans or credit to get by.
Growing Your Assets
By being personal finance savvy, you can easily use your assets (cash) to further grow your empire or net worth.
This is generally done by investing in the stock market, real estate or alternative investment options.
Many people shy away from investments because they do not understand how they work. It can be beneficial to find a financial advisor to help you get started or by using free investing apps.
The ultimate goal should by creating passive income sources which is money that comes in without you having to lift a finger.
This can be investments, interest on a savings account, cash back credit cards, or a handful of other passive income ideas.
You might have a decent company pension to look forward to, but it’s best not to rely on just that alone. Make sure you’re planning for your future by putting money to one side for your retirement.
Be More Financially Stable
While it's common for people to want to “save more” and “spend less,” that’s often easier said than done. Here are ways you can be more personal finance savvy and do what the financial experts suggest:
- Save a set amount each month: Whether it’s a set figure or a certain percentage of your monthly income, make sure you put some money aside each month into a high-interest savings account and – more importantly – leave it well alone. CIT Bank provides an outstanding example of what you can receive in an internet bank with their amazingly high APY and their outstanding service, you can learn more here.
- Be in the know: It’s important that you educate yourself and keep up to date on all the latest news and information that could have an impact on your financial situation. Read the latest personal finance books, take online learning courses, and always aim to improve your level of financial literacy to prevent you from ever getting in any bother.
- Take advantage of technology: There are so many apps and websites out there that can make handling your finances a much easier task to get to grips with. If you’re self-employed, then accounting software such as Xero can make running a business simple. Plus, there is no end of personal finance trackers that can help you keep on top of your finances with you barely having to lift a finger.
- Keep on top of maintenance: Whether it’s your house, car, pet, or even yourself, if something’s not quite right, get it seen to sooner rather than later. It’s much easier to manage smaller maintenance costs than having to fork out the money for a huge emergency bill when you’ve left something too late to fix easily.
- Avoid annual policy renewals: We’re all guilty of purchasing home insurance, car insurance, gas, and electric providers and the like and just letting the policy roll over year after year. But honestly? That’s the worst thing you can do. There are always better deals out there and you should never let any policy auto-renew itself. Shop around for the best deal every year and make sure you’re not paying over the odds.
Answers to Most Popular Money Questions from Personal Finance Experts
I have read and reviewed dozens of personal finance books in the past few years, it just comes with the territory of being in the finance industry. Recently, I was impressed with a new book I had picked up, it was different than the other books I have read in the past.
After receiving a copy of this book in the mail, I was taken back by the quality of it at first sight. It was massive, almost resembling a college textbook. But what really was impressive was the quality of the book (loads of beautiful graphics and charts on high-quality paper) and the quality of the information.
It's broken into six chapters: Banking, Real Estate, Investments, Insurance, Legal Planning, Tax Planning and very well written and informative. Heck, I even showed a buddy of mine the book before we went out to a bar, it's that good!
Well, what's the book?
It's Wealth By Virtue, by Chad Gordon. In addition to writing a masterful explanation of our financial world, Chad is the founder and CEO of GreenStar Advisors.
Got a question for Mr. Gordon? Here he discusses the financial issues facing young adults today, from lowering interest rates to cryptocurrency investing.
Q: Any tips on negotiating a lower interest rate?
Ask for it when you have a small or $0.00 balance. Keep in mind that they make money off usage too.
They know that if you pay it off every month, they can actually entice you to use it by making the interest rate low. But I would also say that if you pay it off each month, does it really matter what the interest rate is?
Q: What If I have a big purchase coming up and want to get a lower interest rate on my credit card account?
I’m not aware of credit card companies changing rates based on upcoming purchases.
Sometimes you can just call in and ask for a lower rate. But the bigger balance you have, the less likely it is that they will do this.
If you don’t keep a balance, then they aren’t making money off you from lending money, but from something called interchange when you use the card.
Q: What's your take on doing a balance transfer?
You are likely to be just rearranging the deck chairs on a sinking ship.
It’s possible, that if you are disciplined that this could be a good idea, but in my experience, more often than not it leads to larger credit card balances down the line.
The reason is that when you transfer a balance, the old credit card usually stays open, but now with a $0.00.
Those who too tempted by credit cards normally start running up the balance on the now paid off card. Paying more money in interest is better than ending up in more credit card debt.
Q: Is it true you can negotiate a “pay off amount” with your credit card company if you can't afford to pay down your whole balance?:
From what I know, this only works, if you are on the edge of bankruptcy and the credit card company, knows that you are at risk of discharging the whole balance.
For one, they aren’t going to have this conversation with you unless you are (1) 90+ days behind (2) are able to write a check for anything.
If you can’t make the monthly payment, you probably won’t have the money to write a check.
If someone is really deep in credit card debt, then my book Wealth by Virtue explains the concept of using bankruptcy as a financial planning tool.
Q: What's the best way to increase my credit rating so banks are knocking at my door with awesome offers?
The best way to build your credit is to live your life in a way that you don’t need it.
Keep your balances on your credit cards very low – use them, but pay them off.
Pay bills right away so that they don’t become collections.
Don’t get big auto loans (especially on a new car that depreciates quickly).
Don’t buy more house than you can afford, even if you can qualify for it.
The key idea is to not go down a path that you can’t sustain. This will build your credit, but to do this with the hope of getting offers for credit cards misses the point of having good credit.
Good credit can help you leverage yourself into greater wealth through the purchase of a home (which I also explain in my book). Using it for credit cards is to leverage your wealth downward.
Q: How can I get the best mortgage rates?
Put more money down, serve in the military, and have good credit.
Usually, mortgage interest rates are not a negotiable thing anymore.
Q: Does how much credit you have matter as much to potential credit lenders as how well you make payments?
It’s hard to say which is more important.
The amount of credit a lender will give you will mostly depend on your current monthly payments – it’s based on something called your debt-to-income ratio (or DTI).
Let’s say for easy math, you make $100 per month. A lender may be comfortable with all of your monthly payments being 40% of the amount you make (in this case $40).
If you already have $30 in payments, they may give you a loan that would add another $10 per month in payments. However, if you have $60 per month in payments, a good lender won’t lend you money no matter how well you’ve done in paying the payment.
Q: Is it better to pay off your entire monthly balance, just the minimum, or somewhere in between?
It is better to use your credit card at least once per month (so that it is shown as being actively used) and pay it off each month.
I’d suggest using it for one specific thing like to fill up your car with gas and then pay it off each month. I have heard some people say that it is better to keep a small balance on there, but I doubt this is going to make a difference.
Keep in mind that perfect credit is usually a FICO score of 740 and above. I think it is better to be in the habit of paying off your credit card, than it is to bother trying to go “deeper into a perfect score”.
Perfect is perfect. Leave it at that.
Q: How risky should 20-25 year olds be with their 401(k) investments?
In my book Wealth by Virtue I explain how young people should see risk and why most investors should be 100% invested in equities most of the time.
Risk is often a word that is over-used and mis-used. The biggest risk that a young person should be worried about is panicking out of the stock market rather than temporary downturns.
My book makes this case very clearly and anyone investing should read it to understand this very important point.
I think of risk as primarily something that would cause permanent loss of purchasing power. When someone asking me about risk in 401(k)s, my assumption is that they are talking about the stock funds in there.
In my opinion, while the balance is certain to fluctuate, for someone investing for the next 40-45 years, I see it as highly improbable that somebody who invests and never sells will experience permanent loss of principle over that amount of time.
I think that this possibility is on par with America declining as a nation, or hyperinflation utterly eroding the US dollar. Not impossible, but not probable.
Q: Do you see cryptocurrencies (Bitcoin, Ethereum, NEO, etc) as a legitimate investment vehicle at this stage?
No, “investing” in cryptocurrencies is a horrible idea.
No credible person can call this investing. It fits every definition of speculating and bubble mentality.
Personally, I am agnostic as to the future price of any of these. I have no idea if the future price will be 1000x times the current price or 1/1000th the current price. I don’t know and neither does anyone else. And that’s just the point.
Ask someone buying into these why they think the price will go up. They may have a rationalization, but whether stated explicitly or not, the reason why they think the price will go up is because the price has been going up.
This fits every pattern of a bubble.
Although I remain agnostic on the future of these cryptocurrencies, and while I can see that they fulfill a missing function in society, my guess is that they are a fad and won’t be talked about much in perhaps as few as five years.
I feel like I know a future pop culture reference when I see one, but I may be wrong and they could serve some function in commerce. It just seems really unlikely.
I can’t see a major merchant feeling comfortable denominating his or her revenue on something so volatile. Case in point, some of these currencies have gone down in price more than 50% the past two months.
This is a normal retail margin amount. If you were a wholesaler delivering inventory in December on a “Net 60 basis” you would have lost all your margin only by the currency you chose.
Any merchant looking at recent prices is likely to be long spooked by this volatility. The only long term case for cryptocurrencies is if merchants see it as a better alternative to traditional currencies.
Ask any business owner, would you rather have a 2% certain loss or a 0% loss, but you have the possibility of either a 50% gain or 50% loss. Paying currency exchange rates doesn’t sound like such a bad thing if you put it that way.
Besides, once you’ve been around the block a few years in finance, you remember past investing fads such as tech stocks, gold, oil exploration, subprime, or when non-investors would talk about things like LIBOR, hedge funds, and derivatives.
To my ear, many of these cryptocurrency names sound like they will fit nicely on this list.
Q: Should Millennials pay a professional to do their taxes or is TurboTax/Free filing software sufficient?
If you work for a corporation and just get a W-2 for your taxes, and all you are looking for is “preparation,” you should do it for free with the IRS – even if it means waiting longer to get your refund.
Taxes aren’t that complicated, especially if all your income is from one source.
Even if you have some 1099s, it still isn’t that complicated. A professional should be used when they are “advising” you on your taxes rather than “preparing” your taxes.
In my experience, good tax advice is not found in the preparation, but in the big mistake prevention.
Conclusion on Why is Personal is Important
Do you want to be better at personal finance? It's possible, in just about any situation, just learn why personal finance is important and you will have one less thing you have to worry about.
Ultimately, if the above options aren’t working out for you, then it’s vital that you know when to seek help when you need it, be it from a friend, a family member or a professional.
Don’t allow yourself to get into any sort of financial mess that you struggle to see a way out from. There are plenty of options out there to ensure you get yourself back on your feet again and improve your financial future.
Hopefully this article can help you get on the road to financial stability.
There should be mandatory classes in high schools and colleges that help young people understand the financial game. It is not uncommon for young adults to be thousands of dollars in debt before they even finish college due to student loans.
Knowledge is key.
For anyone who wants to get better with personal finance, they must be dedicated to learning how to function in the financial realm.
