Photo by Tima Miroshnichenko
For most of us, money is not fun. You usually have to work to get it, spend some of it on things you’d rather not, and managing it can be confusing. But if you don’t manage it, then it will manage you. So, let’s simplify by putting personal finance into the 5Ws and an H framework. Who, what, when, where, why, and how should you manage your money?
Who: Everyone
What: Personal finance means controlling your income, expenses, savings, investments, and debt by making informed decisions to meet both your short-term and long-term financial goals.
When: Now
Where: There are numerous options for where to put your money to make it work for you. Traditional brick-and-mortar banks and credit unions are good for everyday transactions. High-yield savings accounts at online banks are good for longer-term savings. For investments there are apps, brokers, wealth managers, and plenty of others willing to help you. Here are some options to consider.
Why: Managing your personal finances gives you peace of mind, helps you reach financial independence and allows you to achieve your goals. Having an emergency fund and long-term savings gives you confidence to take career risks. For example, taking a job at start up or opening your own business. You have a lot of freedom when you aren’t dependent on others for monetary support. You have flexibility to choose where and how you want to live, work, volunteer, and play. Whether it’s saving for retirement, buying a house, or paying for education, managing your finances is crucial to reaching your life goals.
How:
- Build a realistic budget based on your monthly income and expenses that covers all your essential needs like housing, utilities, groceries, transportation, loans, credit card balances, and emergency fund
- Pay off debt particularly high-interest credit cards and loans. Make more than the minimum payment if you can. Avoid accumulating more debt unless it’s absolutely necessary. Being debt free helps you maintain a good credit score and gives you access to financial opportunities like investing
- Grow your money by setting up automatic transfers to your savings account each month. Your long-term goal is to save at least 20% of your income. Eventually you can use your savings to make a big purchase like a dream vacation, a car, or whatever you want
- Make your money work for you by investing it wisely. If you are a patient person, a financial advisor or wealth manager can help you choose a portfolio of stocks, bonds, and mutual funds. If retirement is many years away for you, these are good ways to grow your nest egg. A financial advisor should also be able to help you understand your responsibilities for taxes, insurance, and retirement planning
When you have control over your finances, you are empowered to handle unexpected expenses, cope with economic downturns, and secure your future.
What do you do to manage your personal finances? Please share in the comments.