Personal finance covers a wide variety of money topics, including budgeting, expenses, debt, saving, retirement and insurance among others. Understanding how each of these topics work together and affect each other is important for laying the groundwork for a solid financial foundation for you and your family.
At the very basic level of personal finance, you are dealing with a budget; you make money and then you spend that money. Even if you have not created a detailed and written budget, you continue to budget on a daily basis. The problem that stems from not having a detailed budget is that we are faced with so many financial decisions — it is nearly impossible to keep track and remember everything. When you create a budget, you begin to see a clear picture of how much money you have, what you spend it on and how much, if any, is left over. Once you can see the inflows and outflows of your money, you can optimise your spending so that necessary items are sure to be covered while cutting back on wasteful spending that will allow you to save money.
After you have created a budget you can begin to see where expenses may need to be reduced in order to meet your goals. For some people, this means eating less meat and for others it could mean getting rid of that extra vehicle. Whatever the case may be, everyone has an area or two where money can be saved by reducing some basic expenses.
Even after creating a sound budget and cutting unnecessary expenses you may still find yourself with lingering debt to get rid of – this is sometimes inevitable for most of us. Let me remind you again, that debt by itself isn’t necessarily a bad thing but there are two kinds of debt: good debt (productive) and bad debt (consumptive).
When you borrow money to purchase a home you are taking on a lot of debt, but are also accumulating assets that can increase in value – productive debt. On the other hand, when you go to a shopping mall and treat yourself to a shopping spree using a loan with over 40 percent annual interest rate currently prevalent on the market, then you are inviting problems.
You see, getting into debt can be easy but I can bet you that getting out of it is never easy unless you have a properly worked out game plan for a productive loan. As a personal finance management rule, the first thing to do when you find yourself in debt is to pay more than the minimum monthly payment and begin with those debts having the highest interest rates. If you only pay the minimum each month it will often take decades to repay the debt and cost more in interest.
Have a blessed weekend as you plan to apply these tips! n