Managing your finances simply means understanding your financial situation and taking stock of things in order to plan for a rainy day. In short, watch your spending and save what you can.
To understand Personal Financial Management (PFM), you need to first know in depth the five main areas of it i.e. Income, Spending, Saving, Investing and Protection.
Income — This is the cash inflow of an individual and mainly stems from common sources such as salaries, dividends and bonuses. It is through income that you are able to spend, save and invest.
Spending — This is what you incur in relation to buying goods, acquiring services or anything that is not considered an investment. It is categorized into either cash or credit. Examples are rent, food, entertainment, mortgages and credit card payments. The more the spending, the lesser the availability to save and invest. If your spending is greater than your income, then you have a deficit.
Saving — It is what is left behind after spending and is retained for future use. However, you need to note that in as much as saving is good, it is more advisable to invest. This is owing to the fact that savings yield little or no returns in comparison to investments.
Investing — This involves asset purchase with the expectation of getting more money than initially used. It is the most complicated area of personal finance as it carries risks, in that, not all investments yield a positive return. They come in different forms such as Real estate, stocks, bonds, commodities and private company shares.
Protection — It alludes to products that are tailor-made for each individual in order to guard them in case of any unforeseen circumstances. The most common products are Life and Health insurance.
Great PFM means preparing a budget or financial plan and following it strictly. With technology being nascent, certain companies such as FinAccess have developed apps that aid in managing finances in a fast and simplified way. It is important as it helps you achieve long term goals and limits or cuts down any overspending. Keep in mind that debts affect your credit score hence a good management system will keep you out of the red.
There are many principles to PFM but these are the three basic main principles:
1. Your spending should be lower than your income.
Never get yourself into debt. Live within your means.
2. Let your money grow.
As earlier explained, savings yield little or no returns. It is therefore advisable to make investments that will in turn make you more money. Before making the decision to invest, compare the different avenues of investing and put into consideration how fast you expect returns — long term or short term. Seek out financial experts who will advise you.
3. Be prepared for the unexpected.
Even the best laid out financial plan can be ruined by an unforeseen event or emergency. This is where savings and protection come in. Ensure that you are covered well for a rainy day.
Managing your personal finances should be a life skill born of habit but just because you did not learn great financial skills earlier in life does not mean you cannot learn them now. There are many credible online resources/applications developed to help you plan well. How to handle money is a serious issue as it may mean the difference between a stressful and stress-free life.