Understanding Personal Finance

Understanding personal finance matters can seem like an enormous challenge to many people, largely due to inadequate training. It is unlikely you received any real education about money in school and far more likely everything you know about such things was learned from your parents. This may or may not have been a good thing.

If you don’t know how to keep track of and make sense of your own money, your chances of ever creating any level of financial freedom are very slim. The first step in improving your financial situation today is learn the basics of personal finance.

Income and Expenses

If you want to save money, there is a very simple formula—spend less than you earn. That is one of the founding principles to understanding personal finance and living a life free of financial stress. Sounds simple, right? Well, for most people it is not.

Easy access to credit in past years and even today for some individuals has made it very difficult to follow this financial axiom. These days it is possible for almost anyone to go and get a big fat cash advance on a credit card or go buy some expensive, but unneeded item at a store all with the notion that they will pay themselves, and their creditors back, eventually.

Set out down your own personal road to financial freedom by figuring out exactly how much income you generate monthly and how much you disburse in expenses. To get things started you will need your income and expenses to balance out, and here is the caveat, you expenses need to include savings. Yes, every month you should be putting a certain amount away in savings. Without this last step you will never be able to get ahead.

Essentially, you want to restrict your spending to the essentials only, as well as some “discretionary” money for fun, just keep you sane. If you try to commit to a savings plan which is too strict, you will be setting yourself up for failure. You need to have some wiggle room to enjoy your life.

Here are a few essential bits of knowledge you should have to get a handle on your own personal finances.

• Know where and what you are spending your money on each month.
• Plan ahead for any ongoing fixed monthly and one-time annual expenses.
• Pay your savings account every month just as if it were another bill that must be paid.

Tracking Your Spending

If you are running out of money each month and wondering where it all went, you have a problem that needs a solution. You are going to have to get serious with yourself and begin to track your monthly expenses. It may be difficult at first, but once you have done it for a couple months on paper using receipts and recording every transaction you should have a pretty good handle on where you money is going. Now it will be a matter of deciding where you might be able to make some changes and save a few bucks.

Understanding Personal Finance—Expenses

It is very important to plan ahead for any one-time annual expenses in your budget. One of these payments can slam dunk a precarious financial situation right into the ground if you are caught unprepared. For example, you might pay a particular insurance or tax bill once a year, still you will need to budget the money for this bill every month so that when the bill comes due you are able to pay it. You do not want to be taking money out of your savings to pay these types of expenditures when you can plan ahead to pay them.

Understanding Personal Finance—Savings

When you first start a savings plan you will want to put that money in a place where it is safe, readily accessible, and hopefully earning a return. The latter can be difficult in today’s low interest environment. Your top priority needs to be safety, which means the money is in a place where capitol is preserved no matter what happens in the world markets. Think bank savings account, money market account, or U.S. savings bonds. Anything else will likely be too risky and not meet your requirements for safety and accessibility. Don't try to chase high-interest rates or top market returns with your savings. That will come later when you begin to invest.