How Should We Manage Personal Finance and Why?Posted by Yan Wen Loh
What Is Personal Finance?
In simple terms, personal finance covers how we balance our income and expenses, as well as meeting financial goals and commitments like planning for retirement, saving for a child’s education or paying off your mortgage.
Time and time again, we still see news of high paying athletes or celebrities filing for bankruptcy, proving that earning big bucks wouldn’t do you good if you have bad personal finance management.
Then, how should we manage our finances?
Before we dive deep into it, we must first understand the importance of why managing personal finance is so important that everyone should master it.
Why Is Personal Finance Important?
There is a saying that a person’s attitude towards money greatly reflects on how we manage our personal finance and spending decisions made.
Without knowing the importance of why we should manage personal finance, it will result in poor financial decisions that will negatively impact our daily life. For example, many people would consider taking up loans from banks with high interest rates when emergency situations occur. Consequently, they become the victims that carry huge financial debts either from loans or predatory lending on their shoulders and some may unfortunately face bankruptcy.
This is bad enough, but the consequences do not stop here. It will continue and turn into a vicious cycle whereby children watch and follow how their parents manage their finances. Eventually they may mimic the same behaviour and live a similar lifestyle that enslaves their lives to chase after money. So, why are personal finance important?
5 Reasons On Why Personal Finance Is Important
1. Provide A Security Blanket (for you and your family)
To ensure financial stability for your family and provide them with an easy life is something that many people would go beyond their reach to achieve it. Family is like an anchor that keeps us grounded and safe. No one can bear the sight of seeing our family members struggle through financial hardships. Without the knowledge on how you can manage personal finance, it will be difficult to cope with our family needs , especially during an economic downturn. With the help of personal finance planning, we can know exactly how much to allocate for expenses and saving, giving us enough cushion to stand through difficult times like the COVID-19 pandemic and provide our families peace of mind.
2. Manage Your Cash Flow
“If you fail to plan, then you are planning to fail”.
Same goes to your money, if you don’t have strategic financial management, you will either overspend or spend uncontrollably on unnecessary items. Knowing where your money is going and developing a proper financial plan is important when it comes to decision making such as investment or huge purchases. You would want to ensure that the decision made will not affect your overall financial stability in the long run. Once you have gotten used to managing your finances, you will have the power and knowledge to take control of your cash flow, subsequently using it to achieve your long term goals.
3. Raise Your Living Standards
When there is another alternative given to choose from, we tend to go for the better options.
The nature of human evolution causes us to strive for the better, and money somehow or rather plays a part in this. Indeed, money doesn't buy happiness but with the help of it, many things can surely be done!
Aside from our desire to constantly improve, we would instinctively want our family to live an easy life too. Whether it is to upgrade a better water filter, a better car or a better school for your kids, once you have the knowledge of financial management, it is easier for you to raise your living standard.
4. Allow You To Focus On Other Aspects of Life
The best part about managing your finances is that you don’t have to play the guessing game with numbers, you will know exactly how much is needed to pay rent, groceries, and when it is appropriate to invest, such as choosing the type of insurance to buy.
Once you have understood how finance management works and established your way to manage it, it will turn into a habit, without you needing to consciously make an effort every time. With a good financial habit, it allows us to stay concentrated and focused on other aspects of our life. Be it for a healthier lifestyle, career development or an environment change.
5. Provide A Brighter Future For The Next Generation
The lack of personal finance awareness leads to many social issues such as divorce, domestic violence and juvenile delinquency. The key lies in financial literacy as without proper understanding of it, kids who are born into lower socioeconomic conditions may likely to raise their children correspondingly, following the footsteps of their parents, unknowingly creating the cycle of poverty.
“Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them.” – Robert Kiyosaki, founder of the Rich Dad Company.
Being financially literate and understanding the importance of managing personal finance, we can break the vicious cycle, as well as nurturing a brighter future for our next generation.
Explore Finance Products & Services To Manage Personal Finance!
11 Steps In Managing Your Personal Finance The Right Way
Ever wonder what is the mindset of millionaires and how they manage their finances? Well, they probably hire someone to manage their finances, but without knowing some personal finance basics, it will be hard for them to remain wealthy.
1. Understand Your Income And Expenses
Income can come in the form of salaries, bonuses or dividends. By understanding how much you earn and spend daily gives you an idea of your current situation.
You can start by asking yourself:
- Am I earning enough to spend? If yes, that’s great, if no, then am I not earning enough or do I spend too much?
- Do I consistently overspend? If yes, what are the triggers that cause me to overspend?
- Do I have enough savings or an emergency fund to cover for unexpected expenses?
These questions can serve as a guide on planning your financial blueprint. Be honest with yourself about your current situation, the more details you listed out the easier for you to plan your personal finance.
2. Create A Budget
When it comes to managing personal finance, one of the most important steps is budgeting, as it serves as an indicator of how well you manage your finances. Consider using an excel sheet in your computer, or the old fashion way - jotting down in a notebook, whichever that suits you. When you lay the figures out in front of you, it is easier for you to track your expenses and monitor your debts, whether they have gone out of control or not.
The 50/30/20 budgeting method is a great way to plan your budget. With 50% of your income goes to all the daily necessities, bills, rent, mortgage or credit card debt, allocating 30% to things you want to spend on, like going to the gym, movie nights, or your Netflix subscription, leaving 20% to save or to invest. The key here is to save first before you spend. The less you spend, the more you save.
3. Restricted Your Expenses
Overspending is one of the biggest issues we face these days and it can do serious damage to our financial planning. Are you paying for a gym membership but find yourself going there less than 3 times a week? Do find yourself buying more than you should just to earn a freebie?
Sit down and think about all the memberships, subscriptions and things that you are paying for, are they a necessity or a result of bad financial habits? Sometimes our emotions can be the trigger for us to spend, making impulsive purchases or lending-money to our loved ones but these can largely impact our financial planning. The newly bought shoes sure look good, but do you need it?
Remember, the objective of managing personal finance is to take into account every penny you spent, is it worth it in the long run?
4. Minimize Your Debt
At some point in our lives, we will come across debt. It can be a student loan, housing loan, car loan or credit card debt. Not all debts are bad, but, why does everyone talk so badly about debt? Because it charges interest when you’re late for your payment, if you ignore it for some time, it can cause a snowball effect. Most of the time, people who need help to manage their money actually face unmanageable debt issues.
The goal here is to understand your debt, how to minimize it and pay it off faster. First, you need to get it under control, have you been paying your loans or debt on time? If you find it hard to keep up, set up auto-debit from your banking account to do the work for you.
Consolidate your debt and tackle them bit by bit, remember, persistent is the key.
5. Build An Emergency Fund
There is always a chance for unforeseen circumstances to happen, when we have some extra money sitting in our bank account, we are less likely to be stressed out when going through difficult times like COVID-19 pandemic. Saving us the trouble to borrow money from our loved ones or selling our assets.
But how much should we save to be considered enough?
The standard answer is between 3-6 months worth of living expenses, but ultimately this is up to you, picture yourself having no income at all, can you live with that amount?
Read More About: 10 Practical and Easy Ways to Save Money
6. Building Your Assets
Building your assets is a stepping stone to fund your retirement and investing is one of the common ways. The younger you start to invest, the more you will benefit, thanks to the power of compounding interest. Hence, it is advisable to start the journey of investing, especially when we are young.
There are many investment opportunities for fresh graduates and beginners, to start off, you can invest in a bank’s fixed deposit, as the interest rate is higher than your savings account and it is almost risk-free.
Read More About: 7 Investment Tips For Fresh Graduates and Beginners
Stepping up the ladder, you can look out for government or large organization bonds which, no doubt have a higher return than fixed deposits, but also come with little risk. Moving along with greater risk and return you can turn to mutual funds and stocks.
There are many online investment tips that you can find out through financial related blogs, where they are real people sharing about their journey in investment. Here are some other ways to build your assets and earn passive income that requires little to no effort.
Read More About: Best Passive Income Ideas To Earn Extra Money
7. Plan For Your Retirement
It is hard to imagine our life so far away, but time flies and we don’t want to get caught up unprepared when we are old, don’t we? The sooner we start to save up for our retirement, the more benefit we can reap when we are old, think of it as delayed gratification.
You might be asking yourself, how much should I save? There are many ways to get the figure, you could either use a retirement calculator, like this one. You can also take your desired annual retirement income and divide by 4%, which is known as the 4% rule.
Say you foresee yourself spending up till $3000 a month when you retire, (be honest about your spending habits!) which makes up to $32,000 annually. Take $32,000 and divide by 4% and a rough figure of $800,000 is how much you will need to set aside in order to retire comfortably.
When there are so many guides available on how much you should save for retirement and the numbers might seem impossible to reach, consistency is the key. As we have suggested previously, make it a habit to consistently set aside 20% of your income for saving and allocate half of that as your retirement fund.
8. Monitor And Reassess Again
Take some time at the end of each month to re-evaluate your financial planning, because there’s no such thing as one size fits all, everyone has their individuality. What works for most people may not work on your case, so don’t feel disappointed if whatever solutions given by the experts don’t seem to work for you. As we grow older, our priorities in life change, so do our goals. Constantly monitor your financial planning and tweak it if necessary to suit your current needs.
9. Expand Your Financial Knowledge
Managing personal finance is a learning journey that never ends, with so many resources nowadays (many of them are free!). It is hard to find an excuse not to master your personal finance. A great way to test out the water is by reading personal finance blogs. Behind these articles, people are sharing their own personal finance journey, the real challenges they are facing and how they solve them.
Some of the examples are:
- The Woke Salaryman (their illustrations are quite funny!)
- Seedly (Singapore)
- Mr Money TV (Malaysia)
- Ready to be Rich (Philippines)
- The Wealth Wisher (India)
- MoneyHero (Hong Kong)
- Money Under 30 (U.S.)
Another interesting way is to follow the social media of finance bloggers you look up to. From time to time, they will reach out to their audience through live stream, Q&A sessions or conduct a webinar, which is awesome because you get to ask questions and listen to others as well, providing you with a different perspective towards personal finance.
10. Being Minimalist Through Decluttering
Why is minimalism good for us? You might wonder. One of the obvious reasons is because owning fewer belongings equals spending less money. Being a minimalist, especially through simple actions like decluttering and selling our clutter can help to alleviate our financial burden.
For example, the Konmari method teaches us what we need and what we don’t in our living space. By understanding what is essential in our life, we will be more aware of how we spend our money and the value behind each purchase. As the saying goes “A man’s trash is another man’s treasure”, you will never imagine how much others are willing to pay for your clutter!
Read More About 6 Decluttering Tips To Organize Your Home
11. Consider Second-Hand Items
Thrifting, another glamorous term for secondhand shopping, which has been made popular by mainstream media and influencers, are on the rise according to Fortune.
It is easy to see why it helps us to save money. Hands down, the most obvious benefit of buying second-hand items is helping us to cut down the expenses. There are so many things that we can save on by buying second-hand!
Here are some examples of things not to buy new:
- Children's clothing (they grew up so fast!)
Many people have the perception that big events like weddings and graduation are bound to have big expenses, but that’s actually not the case. There are many tried and true ways that can help you save on these big events without sacrificing aesthetics.
Take a wedding gown as an example, do you know that the price difference between a used and new wedding gown can go up to 65%? No wonder the bridal resale market is currently on the rise now (according to Business Insider).
Have you thought of ways to save on your wedding?
Check out platforms such as Shopee, Carousell or Craigslist where there are many second-hand items you can find, along with the seller’s review, which gives you an idea of their credibility.
Read More About 3 Budgeting Tips To Manage Personal Finance For Wedding
What Are Some Myths While Managing Personal Finance?
Although there are many guidelines on managing personal finance, everyone has individual circumstances.
Take building an emergency fund as an example, many experts might advise you to save up till 6 months worth of expenses. But if you are having high-interest rate credit card debt at the moment, saving up so much might just turn out to be a costly decision.
Many people also preach about the greatness of having a passive income. Once you have established a side hustle, you will be worry-free on your journey to financial freedom, which in most cases, is not as easy as it sounds. Here are some misconceptions about building a passive income that you should be aware of.
Read More About 5 Common Misconceptions About Building Passive Income
Which Personal Finance Tips Will You Adopt To Better Manage Your Income?
Managing our personal finance is like a marathon that never ends, there’s always more to learn, things to change.
But one thing remains true, is that being able to manage your personal finance effectively will make your life way easier, not to mention, help you to lower your stress level.
Always keep yourself updated, from time to time, monitor and re-evaluate your plan to keep them in check with your financial needs. Do let us how you manage your finances by commenting down below! We’d love to hear more about it. There are many interesting ways you can earn extra money and rewards, you might be surprised how easy it can be!
Remember, persistence is the key. Rome wasn’t built in a day, so give yourself some time to master the ways of finance management. Good luck!
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