You’ve undoubtedly heard of the term “personal finance”. The term sounds fancy and kind of intimidating, right? It can be confusing to figure out what exactly is involved in “personal finance”, how it’s related to a financial plan, and what the key components are.
Let’s start by defining the term itself, so we’ll break it down into its elemental parts: Personal means you, so that’s easy. We’re talking about you and your own situation, whether that involves just you and/or your spouse and/or your children. Finance is your money and what you do with it. Simple stuff!
Now that we know what personal finance is, let’s discuss some basic crucial personal finance concepts:
- Spend less than you make. You probably make money from a job or maybe some other source (side business, dividends and interest, etc.). This is called “income”. And you probably spend money on things like food, housing (rent or mortgage), cellphone, utility bill, clothing, and more. These are called “expenses”. So the goal is to make sure your expenses are not more than your income at any given time.
- When you spend money, use self-control. Things like expensive clothes you can’t afford, fancy dinner and drinks, and sleek new cellphones can all be enticing. But ever feel guilty afterward as you’re checking your bank account? Use some self-restraint and don’t give in to the pressure of buying more than you need. It’s just not worth it.
- Pro tip: Reward yourself whenever you avoid giving in to the pressure to spend money. Maybe you treat yourself to a nice hot bath, an affordable bottle of wine or four pack of beer, or a movie rental. Basically, think of a way you can reward yourself without spending too much money on the reward (obviously).
- Use credit wisely. “Credit” is a term reserved not only for credit cards but all other types of loans. This could include a mortgage on your house, car loans, student loans, debt consolidation loans, and others. Be sure to use credit only for the things you need, not the things you want. You need housing, you may need transportation, and you may have needed to take student loans to get a good job. Other than those, be very careful of using credit for much else, especially for the things discussed above (shopping, dinners, etc.). Wise usage of credit also applies to the necessities – don’t give in to buying a bigger or more expensive house than you need, or a car that’s more than you can afford. That only results in bigger loans and higher payments that will unnecessarily squeeze you financially.
- Develop a savings plan (our preferred approach) or a budget. Think positively and focus on how much it will help you control your finances.
- Save up an emergency fund. It will undoubtedly be handy at some point in time.
That should be plenty for you to start with. Stick with us for more pro tips on winning the personal finance game!
For lots more on how to crush the personal finance game and find early retirement, make Firreo your financial advisor. We’ll help you out of your job and on your way to financial freedom!