MoneyTalk: Understanding and Implementing Personal Finance Management Strategies

 

Do you have a lot of financial stress in your life? Did you know that effective Personal Finance Management can significantly reduce the stress in your life?

We all need to work and earn money to survive. Most people work very hard every day to earn money. In fact, many people routinely put in 12 to 14 hours every day working to earn money. Despite this, the majority of working adults experience money problems on a regular basis. According to a recent survey taken by a leading financial institution, almost 40% of working adults said that they would have to take a loan to cover expenses of even $1,000.

Let’s first talk about personal finance management, why it is important and why you should diligently implement this concept to achieve a stress-free financial life.

There are many reasons such as low wages and the ever-increasing cost of living that impact a person’s financial life. However, the reality is that most people do not do a good job of managing their finances. This could be due to multiple reasons such as being too busy, being not comfortable with numbers, or simply being afraid to look at your bank and credit card accounts. When we are not doing a good job of managing our finances, no matter how hard we work, we will always feel that the money we earn is not enough to meet our and our family’s financial needs. Which is why, Personal Finance Management is extremely important.

Personal Finance Management, in simple words, refers to the concept of smartly managing money you earn, controlling expenses, increasing savings and investing the savings to keep growing your pot of money. Personal finance management involves activities related to banking, budgeting, loans, investments, retirement planning, insurance, and tax planning.

Personal Finance Management is important in realizing your financial goals which can be short-term, mid-term, or long-term goals. These goals can be about saving for short-term financial needs, purchasing a house or a property, saving for your child’s education, or planning for retirement. One may say that getting a job and earning money is the easy part but managing your finances effectively to achieve your financial goals requires discipline, persistence, and dedication.

Now that we have some idea about Personal Finance Management, let’s talk about how you can implement an effective strategy to manage your personal finances.

1.  Become Financially Literate

In today’s world, it is very necessary to be financially literate. Financial literacy means becoming familiar and educating oneself with the various concepts related to money. There are literally thousands of books, blogs and videos available that educate people about money. Investing your time in learning about money can help make the most of your income. This education further protects the person from losing money needlessly.

Some schools even offer courses to help you learn to manage your money. The learning can also be through online articles, blogs, courses, podcasts, and libraries. This literature can help you become smart with your personal finances by educating you about earnings, expenses, budgeting, paying bills, paying off debt, creating an emergency fund, using credit cards wisely, and, most importantly, saving for retirement.

Many folks encounter financial problems arising out of financial illiteracy, and some even have to face plenty of emotional turmoil and distress because they had not made the right or wise decisions in the past, which is why it is very important to invest time and even money in becoming financially literate as financial literacy aids in distinguishing between good and bad financial behavior and empowers you to make savvy and educated decisions concerning your money.

 

2. Understand Your Money Better

Most people earn money and then end up spending most of that money or end up spending more money than they even earn. This type of behavior will lead you to having no or very less money being available when you have to deal with any emergencies or unfortunate life events such as being in an accident or losing a job. Which is why, one should prepare for the worst when you are earning money by understanding your money better.

You should take a detailed look at all the money coming into your bank accounts and all the money leaving your bank accounts. You need to analyze how much money has entered your bank accounts last month or even this year so far. And, then look at, of the money that has entered, how much money went out and where did that money actually go. At a simpler level, at least look at the money that you earned last month and of those earning, how much did you end up spending and where did you spend that money.

This exercise of understanding your money flow will make you much more aware of your financial situation and will empower you to make better financial decisions.

3. Organize Your Personal Finances

You should do an honest and dedicated effort to organize your finances. Most of us have scattered finances, meaning we have multiple bank accounts, multiple credit cards, have multiple bills to pay, have multiple loans such as car or mortgage loans, and have multiple investments such as employer sponsored investments or your own investments in stocks. And, if you have a spouse or a partner, this problem of scattered finances is magnified further.

All this critical data about your personal finances resides with different financial institutions. And, if you do not get all of this data together then it will be very difficult and complex to get a real picture of your personal finances.

We recommend that you use MoneyPatrol to organize your personal finances. MoneyPatrol allows you to link all your financial accounts and then securely pulls this data and information and makes it available to you at one place. Having all this data organized in one platform will empower you to truly understand what is going on with your money and finances.

An application like MoneyPatrol will not only help you organize your personal finances by getting all the data at one place, but will also help you easily track your expenses, your bill payments, your net worth, your credit score, and your overall financial health. And, most importantly, such applications will pull your transactional and account history and will continue to update your accounts on a daily basis so that you always have the latest data and information from all your financial accounts.

 

4. Focus on Savings and Investing

Once you have organized your finances, start tracking how much you have been earning and spending each month. Find out if you have been spending more or less compared to your earnings. Now, if you have been spending more than you have been earning, your main priority should be to spend less than you earn. And, if you have already been spending lower than your earnings, then your priority should be to spend even lower than what you had been spending so far. Another option around this is also looking at increasing your earnings and assuming that your expenses don’t increase, you will have more earnings than you’re spending.

The reason for focusing on spending way less than your earnings is to improve your Savings rate. The more money you can keep from going out of your accounts, the better it is going to be for your future. We recommend that you adopt a frugal lifestyle, create and follow budgets, and cut down your expenses wherever possible such as eating out less in restaurants, spending less money on entertainment, cutting down on your subscriptions, spending less money on shopping, using coupons and discounts when shopping, and even looking at refinancing your loans so that you pay less interest on your credit card loans, student loans and mortgage loans.

Now, whatever money you can save, you should keep some money aside as part of an emergency fund, but for the remaining money, we recommend that you invest that money into index funds. Most index funds have consistently given 8 to 10% returns each year, and if you consistently invest your savings every month, then over a period of a few years, with the magic of compounding, you will have a very healthy amount built up in your portfolio. You can, of course, withdraw these investments when you need them such as for down payments towards a home purchase. But, if you continue to invest diligently each month, you can have a big enough amount saved up that you can even retire comfortably sooner than the typical retirement age of 65.

For example, if you can save and invest $1,000 every month for 25 years, and if you receive an average of 8% returns, then even though you have only invested a total of $300,000, due to the magic of compounding, you will have $1 Million available. Of course, if you can save and invest more each month, you will have much more money available over time.

 

Let’s quickly summarize what we have discussed in this MoneyTalk:

Everyone has experienced money trouble in their life, and Personal finance management is very important and critical if you want to lead a financially stress-free life. 

The key elements in effective Personal Finance Management are:

1. Become Financially Literate

2. Understand Your Money Better

3. Organize Your Personal Finances

4. Focus on Savings and Investing

Most people have been working very hard all their lives, but keep struggling for money. If you truly want to achieve financial freedom, then following and diligently implementing personal finance management strategies to manage your financial life is the only way forward.