One of those skills that isn’t taught in schools but is absolutely critical to success in the modern world is the ability to manage personal finance and handle matters like debt, savings, and planning for retirement.
The reason for this is probably because the field of finance is not only complex, but few adults have actually mastered it themselves.
Yet there are a few fundamentals you can start mastering – today – that will change your life tomorrow.
And they’re terribly easy to understand. In this article, we’ll review five fundamentals of personal finance as well as explain to you how mastering them can have a positive impact on your daily life.
5. Getting Into a Savings Mindset
The hardest part of walking the path of personal finance and responsibility is getting started itself.
It requires a change in mindset and a shift from consumption to savings and from impulse to planning.
The best advisors don’t tell you to stop spending entirely, but they will point out to you the exercises you can undertake to make sure you’re spending wisely and truly meeting your “real,” not perceived, needs.
The goal of creating a savings mindset is to empower you as an individual to take charge of how you spend money and it will help you when times are tough (such as when you’re tempted to spend frivolously) as well as keep you cognizant of the benefits of the path you are walking.
Budgeting is part of building the savings mindset we talked about above. It is also one of the most critical exercises you can undertake in personal finance. Why? Because it helps you see yourself from a different perspective – and you might be surprised by what you see. That’s because budgeting paints a picture of your spending in a real, tangible sense.
If you waste money on frivolous things, this will become apparent. It’s also a tough process because, for those of us that have truly struggled with personal finance, it might make you feel stupid or powerless. But the opposite is true. Budgeting is an act of empowerment and it gives you that energy so critical to make concrete steps towards actual change.
We recommend starting out with goals for your budget and then trying to meet those goals.
The important thing is that you are aware of your spending and seek to actively control it. Even if you fall short, we know you will save more money if you are forced to consider every purchase rather than simply spending at will.
3. Cutting Expenses and Negotiating
When you’ve made your budget, you will begin to see things on which you spend a lot of money and this forces you to make decisions. You can cut expenses or even eliminate something entirely. Or, if you decide you cannot live without something, you can cut in other areas that aren’t as critical to make it work. For recurrent bills or expenses, such as a telephone bill, you should think about renegotiating your contract to save money or look for a cheaper plan with another company.
When monitoring your expenses, think about what you can do and then act upon that. We even advise you to try things that might seem unconventional or impossible because, you never know, you might succeed.
One area that some people have had a lot of luck is in negotiating lower rent payments in exchange for handling more of the maintenance yourself or even consolidating your bills with a personal loan.
2. Saving and Investing
Saving and investing is for those of us that have gained some control over our personal expenses and financial future. That means it is an aspirational position and for good reason: Paying off debts first is often a smarter financial move than saving the money or investing it. Why? This is because a savings account will return a lower rate than what you are being charged on any debts you may have meaning that the money would be more efficiently spent paying down balances rather than sitting in an account.
As far as stock market investments are concerned, it is possible for you to get a higher rate of return on your investment than what your debts charge you but it’s also possible that you lose everything or most of it. Given that risk, you should relegate saving and investing for when you are financially prepared.
1. Planning for Retirement
Planning for the future is the goal of personal finance mastery because, one day, you might not be able to earn a regular income anymore. You need to be prepared for that. This is why so many advisors counsel that we abstain from certain purchases now in order to save for this later date. Financial instruments that you will want to explore include both personal and company-based retirement accounts as well as life, health, and disability insurance options.