Tuesday, May 15, 2012

10 Things to Know About Personal Finance

10 Things to Know About Personal Finance



The aim of personal financial management is about financial independence. To be able to enjoy financial freedom you will need to know the 10 topics and act wisely:

1.       Savings: Savings is a good habit to build a solid financial foundation from young. However, you can start at anytime time to save as long as you have regular income; the most important thing is to avoid procrastination. Do you know how long it takes you to double your money? Use the magic number of 72 divides by the rate of return. If the interest rate is 6% your original $1000 will double in (72/6) 12 years. You do not save for the sake of savings. It is the starting point to build your wealth and be financially independent.

2.       Expenses: Spend time to record your daily expenses because you want to find out where your money goes.  You will be able to do a meaningful budget when you know your actual spending every month.

3.       Living within your means: You know how much you are getting each month  and you also know your spending pattern by recording your expenditures, it is time to do a budget so that you will spend less than what you have earned and also set aside an amount each month for savings. The purpose of a budget is to avoid overspending and getting into debt. If you want to spend more you have to earn more.

4.       Good debt and bad debt: Distinguish between good debt and bad debt. A housing loan is a good debt because property appreciates in value over time. A car loan is not a good debt but it is a big ticket item that you can’t buy with cash. The trick is to put down a bigger down payment so that you will settle the loan in a shorter period and incurring   less interest. Credit card debt is definitely bad debt because you pay more for an item that you can buy in cash. An educational loan is a loan and it is a bad idea to be in debt before you can earn a living. Besides, you are not certain that you will get a job upon graduation. 

5.       Wise use of credit cards: Credit cards are wonderful tools to establish your credit worthiness. The right way to use is to settle outstanding amount fully every month. You need a credit card to do online purchases and you pay less with a cash-back credit card. You can also redeem goods with points earned for all your card purchases. Most of all do not get into credit card debt.

6.       Emergency fund: One of the reasons to save is for a rainy day. You never know when you need an amount quickly and easily. An emergency fund is also needed just in case you are out of job for a couple of months and you still can live normally without financial constraint. Keep some money in a savings account good for about 6 months.

7.       Investment: If you do not save, you will not be able to accumulate fund and build your wealth. You build your wealth for your children’s education and also for your retirement. The key is to diversify and invest in stocks, bonds, mutual funds and real estate. The word to remember is long-term. Never believe in get- rich-quick schemes or other scams. 

8.       Insurance: You need insurance protection to cover personal disability, critical illnesses, property damages and personal liability in case of lawsuits. Insurance coverage will lessen the impact of your financial losses.

9.    Financial learning: Adopt a learning attitude about finance. When you learn more, you know more and you can make wise financial decisions.

10.  Retirement: The tragedy of life is when you stop working there is no more money coming in for your retirement. To get peace of mind and a care-free living, plan early for your retirement. Live you golden years independently.

If you are in debt now, the most important thing to do is to get out of debt as soon as possible to avoid incurring more and more interest. It can reach a point where the debt is beyond your control and you could be a bankrupt.

Use this article as a check list to determine how healthy your personal financial well-being is. 




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