Are you wondering why personal finance is important? The reasons cannot be overemphasized.
A recent study in the United States reveals that just thirty percent of Americans have secured a long-term financial plan, with about forty percent having $300 or less in savings.
The result?
Financial illiteracy cost average Americans $415 billion in 2020.
Individuals’ income in most parts of the world covers fewer expenses as goods and services increase.
Furthermore, the upshots of unemployment, government policies, and global health challenges have adverse effects on individuals.
That is evident in the US, where the personal finances of a shocking sixty-three percent were affected by the Covid-19 pandemic.
These alarming statistics reveal why we all need to sharpen our knowledge of financial management, properly manage finances, and what to expect concerning the rise and fall of the economy.
Personal finance is one such vital way to manage finances effectively.
Related: 20 Personal Finance Tips For Financial Success
What is Personal Finance?
In simple words, personal finance can be referred to as the process of an individual managing their own money.
It encompasses income, essential demands, expenditures, savings, investments, and financial decisions or targets — either long or short term.
Personal finance depicts the total economic operation in an individual’s life, including institutions that offer financial services to them.
Regarding the above, retirement planning, banking, estate planning, insurance, budgeting, and so on are further aspects of personal finance.
Why is Personal Finance Important?
Personal finance is a crucial procedure to attain financial freedom, which liberates individuals from debts.
It also helps them manage resources, make beneficial financial decisions, meet short and long-term needs within income limits, and adequately pay for bills.
Getting this management skill will help you handle your finances well with concepts that offer financial stability and how to raise financial stability.
We will consider ten reasons why personal finance is essential in this article.
Also, we shall recommend some digital tools that could make your finances more organized and effective.
1. Income Management
Income management is one of the most crucial reasons why personal finance is essential.
With proper planning, income can be managed effectively, prompting savings and investment and helping to avert unnecessary or overspending.
Prioritizing expenses concerning savings, tax payments, and bills are elements incorporated into income management.
There are several free resources that can be used regularly to watch spending, manage the budget, and improve fiscal responsibility.
Digital tools like Mint, Personal Capital, and Trim are superb budgeting apps concerning the above.
Trim, for example, automatically evaluates bank accounts and regulates expenses that will help you save money and invest in other areas.
Related: 50 Personal Finance Vocabulary You Should Know
2. Investment and Future Visibility
Personal finance helps you see money in a broader perspective, beyond employment, wage, and disposable income.
A more comprehensive assessment of finances will aid structural spending that will result in short or long-term planning and investment.
Personal finance planning will factor in an individual’s current income concerning their expenses while considering their financial goals and schemes toward the goals.
Retirement plans, loan management, timely bill payment, and macroeconomic elements like inflation are additional factors that will be considered using personal finance.
Personal Capital is a suggested digital tool that can be really helpful if you find it challenging to invest and plan for the future.
The “net worth tracker” gizmo can be used to ensure money management and investment in as low as ten minutes per month.
3. Cash Flow
Personal finance aids cash flow increase via spending pattern and expenditure management.
Structural budgeting, tax planning, and cautious spending are elements that personal finance employs to increase cash flow.
These elements will ensure that you follow a financial course that will likely result in success.
You can easily use Mint, PocketGuard, and Personal Capital to track cash flow progress.
Related: 50 Financial Literacy Vocabulary Words You Should Know
4. Budgeting, Spending, and Saving
American businessman and radio personality Dave Ramsey advised, “Don’t spend more than you earn.”
Why?
A large amount of income does not guarantee financial stability because an individual may incur huge debts if they neglect budgeting, planning, and prudent spending.
Some individuals naively spend in excess of their income; therefore, personal finance will be helpful in such regard.
Personal finance will help individuals prioritize their expenses within the limited available resources by assisting them in understanding their income, recurring expenditure, and how to plan within the income.
A strictly followed budget can prevent an individual from overspending on status symbols, unwanted goods, and luxuries.
5. Financial Understanding
Personal Finance offers you an elite perspective of your finances by establishing financial goals, understanding financial decisions and their effects, and assessing prior financial results.
Financial understanding through personal finance will help an individual improve control of their economic lifestyle.
6. Family Security
Personal Finance benefits a family, not only the practicing individual, by offering family security.
People yearn for family security to such an extent as it is a financial priority and for substantial reasons.
For instance, family security would cushion financial struggles, especially after the demise of a breadwinner.
You can plan your net income with your personal finance knowledge by investing in the most suitable insurance policy and saving adequately.
7. Raises Standard of Living
The application of personal finance to enhance family security, financial understanding, income management, investment, and so on will result in an improved standard of living.
How?
Investments could yield profits, more money could be saved, there will be an increase in cash flow, and expenses can be prioritized, generating more disposable income.
8. Protection from Unmanageable Debts
Prominent English evangelist Nathan Morris stated, “Every time you borrow money, you’re robbing your future self.”
Therefore, importance should be attached to debt management to ensure that future finances are protected.
Personal finance offers protection from unmanageable debts, prompting wealth growth and a sense of financial security.
An elite knowledge of personal finance will help individuals keep check of their expenses regardless of how their net income increases or decreases.
Excessive credit card usage also increases debts, which sometimes could be unmanageable.
9. Growing Assets
In Europe, household financial assets equaled 216.8% of the Gross Domestic Product (GDP) in 2019.
The assessment of household assets relative to GDP shows how much asset allocation and growth is an important factor in the national economy.
Personal finance aids improved asset growth by factoring in asset choice, asset value, and risk management.
As such, an individual will be able to choose an asset to invest in based on his capital value and risk tolerance after carefully considering the future reward.
10. Emergency Management
Personal finance will help you plan for unexpected events that could become barriers to your financial goals.
With proper planning, you can efficiently manage emergencies without incurring unmanageable debts and interfering in your preplanned primary objectives.
Wrap Up: Financial Success is Attainable
Personal finance is one essential step to financial success.
The reasons highlighted in this article are issues affecting several individuals in every part of the world, as shown in the statistics and demographics cited.
Therefore, it is essential for everyone who seeks financial stability to learn the art of personal finance.
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