Personal finance is the way you manage your money and plan for the future. Your financial health is affected by all of your financial decisions and activities. It’s always a good idea to think about what we should be doing in general to improve our financial health and habits.
Financial health refers to the state of one’s personal financial affairs. Financial health has many dimensions, including the amount of savings you have, how much you save for retirement, and how much of your income you spend on fixed or non-discretionary expenses. Here, we’ll go over five broad personal finance rules that can help you get on track to achieve whatever financial goals you have.
1. Calculate Your Net Worth and Personal Budget
Money comes in and money leaves. For many people, this is as far as their understanding of personal finances goes. Rather than ignoring your finances and leaving them to chance, a little number crunching can assist you in evaluating your current financial health and determining how to achieve your short- and long-term financial goals.
Net Worth Calculation
As a starting point, determine your net worth—the difference between what you own and what you owe. Begin by making a list of your assets (what you own) and liabilities (what you owe) (what you owe). Then, subtract the liabilities from the assets to determine your net worth.
Making a Personal Budget
Creating a personal budget or spending plan is also essential. A personal budget, whether created monthly or annually, is an important financial tool because it can help you plan for future costs, reduce unnecessary spending, save for future goals, and prioritise where you put your money.
Subtract your expenses from your income after you’ve made the necessary income and expense projections. If you have money left over, you have a surplus, and you can choose whether to spend it, save it, or invest it. If your expenses exceed your income, you must adjust your budget by either increasing your income (working more hours or taking on a second job) or decreasing your expenses.
2. Identify and Control Lifestyle Inflation
Most people will spend more money if they have more money. As people advance in their careers and earn higher salaries, they tend to spend more, a phenomenon known as “lifestyle inflation.”Even if you can pay your bills, lifestyle inflation can be detrimental in the long run because it limits your ability to accumulate wealth. Every naira you spend now means less money later and during retirement, and having more disposable income today does not guarantee to have more money later. Re-evaluate your personal budget as you progress through life stages to ensure that it reflects the right conditions in your life.
3. Recognize Needs vs. Wants—and Spend With Caution
It’s in your best interest to understand the distinction between “needs” and “wants.” Food, shelter, healthcare, transportation, and a reasonable amount of clothing are examples of necessities. It’s also important to set aside money for savings each month, though this is much more dependent on your other needs being met first. Wants, on the other hand, are things you’d like to have but don’t need for survival. These costs may be so ingrained in our daily lives that they appear to be necessities. Wants are non-essential items, such as a streaming subscription that isn’t necessary for survival or skipping a morning treat that has become part of your daily routine. Your personal budget should prioritise your needs.
You should only spend your discretionary income on wants after your needs have been met.
4. Begin saving early.
It is frequently stated that it is never too late to begin saving for retirement. That is technically correct, but the sooner you begin, the better off you will be in your retirement years. This is due to the ability of compounding. Compounding is the reinvestment of earnings, and it works best over time. The longer earnings are reinvested, the greater the value of the investment and the larger (hypothetical) earnings will be. The sooner you begin, the easier it will be to achieve your long-term financial objectives.
5. Create and Keep an Emergency Fund
An emergency fund is exactly what the name implies: money set aside for emergencies. The fund is designed to assist you in paying for items that would not normally be included in your personal budget. This includes unexpected costs like car repairs or a trip to the dentist. It may also assist you in meeting your regular expenses if your income is interrupted.
Many people do not have the time or inclination to properly manage their finances. Many people are too preoccupied with work and family to keep up with investment options and understand the risks involved. A financial adviser can assist you in achieving your objectives. Personal finance rules can be effective tools for financial success. However, it is critical to consider the big picture and develop habits that will help you make better financial decisions, ultimately leading to better financial health.
Featured Image Source: Crosswalk.comGot a suggestion? Contact us: editor@connectnigeria.com
You might also like:
- Celebrating the Holidays on a Budget
- Tips for Managing Your Business’s Financial Records
- Borrowing From Friends or Family? Read This First
- How to Avoid Scams and Fraud in Nigeria
