In this article, I want to talk to you about Personal Finance.
I will reveal to you how by following some very simple ground rules, your life can improve and your finances can benefit from it.
First of all, however, I want to explain to you what personal finance is and why it is so important to understand its functioning and mechanisms.
In this article
- What is personal finance?
- Why is personal finance crucial?
- The life cycle and personal financial needs
- How to manage income and expenses effectively?
- Why do you need to protect yourself from risks?
- How much do you need to save?
- What to do with the money saved?
- Is it worth getting into debt?
- Can you do everything yourself or do you need a consultant?
What is personal finance?
By personal finance, we mean the management of personal financial issues.
It is therefore all those aspects related to money and the management of income and expenses of individuals.
We, therefore, focus on the actual movements of money and on the time factor, which is fundamental when it comes to money.
The term personal finance is often used because, as with many issues, the literature on the subject was born in the United States and from there it spread to the rest of the world.
Why is personal finance crucial?
Cash is King.
Without money, nothing is done.
But unlike what you think, it’s not just the money we make today that matters.
It is important to plan for the future, to manage income and expenses in a balanced way.
The application of some basic rules of personal finance leads to living in a balanced way and managing income and expenses with a positive balance.
Is it just enough to increase revenue?
Unfortunately, the answer is NO. In fact, how many times do we hear of some star having ended up on the street?
It is not only important how much you earn, but how you earn it and when you earn it.
In the game of personal finance, whoever manages to secure constant income, both today and in the future, wins.
Income that cannot come only from work, but must also be guaranteed from other sources.
But let’s go in order.
The life cycle and personal financial needs
As a first aspect, I would like to focus on a fundamental concept in finance: time and the evolution of people’s needs.
I translate it to the fact that people usually have money when they don’t need it .
As young people we have a thousand ideas for spending money, but we don’t work and even if we do, we earn little.
Growing up, financial resources increase and expenses usually decrease, at least in proportion.
Especially in Italy, there are many pensioners who manage to save a large part of their pension and even often support their children.
There is little point in leaving rich legacies.
Maybe we all make some financial planning mistakes.
The number one rule of personal finance is therefore to do the exact opposite of ordinary people.
If you want to have a balanced management of your money you have to start earning and saving as soon as possible.
In this way you will not have to resort to debt as a young person and you will be able to enjoy a comfortable life immediately and especially when you arrive at the working stage.
It is full of thirty-somethings asking their parents for money to make it to the end of the month …
It is important to save as a young person because the money saved thanks to the investment translates into additional income compared to that generated by earned income.
And thanks to the effect of ‘ compound interest, the weather can really play an important role in the propagation of their own money and generating new revenue.
How to manage income and expenses effectively?
Having established that to have an efficient financial management it is essential to generate a positive differential between income and expenses, let’s see how to do it.
First you need to have some income.
The income, unless you have inherited some fortune, can only come from work.
If you want to get rich, you have to work.
The more you work, the more you earn and the more you will increase your income.
However, if you don’t want to get caught in the mouse trap, you have to be careful.
It’s not enough to work harder, you also need to improve the quality of your work and increase your hourly wages.
When I was just starting out, I worked 12 to 14 hours a day.
You know what?
I often did this to obey unwritten rules of the model employee.
First to get to work in the morning and last to leave, never before my boss.
Today we say that I have focused much more on the quality of work even if I continue to maintain excellent standards in terms of hours.
Growing up at work also means knowing how to choose between activities that pay little and that you can delegate and fundamental activities that you cannot delegate to anyone.
Always try to limit your intervention to a minimum. You will have more time for your interests and to look for new opportunities.
Obviously, if you continue to increase your income, but at the same time increase your expenses, you will never reach any goal.
Here, if you don’t want to fall into the trap, you will also have to learn how to save and set savings goals.
A key tool to achieve this is to track your expenses.
Tracking expenses means taking pen and paper or opening an excel file and marking the main expenses made each month.
The goal of this activity is to identify which expenses can be reduced and how to act.
The advice is always to focus on the most important expenses first.
Leave the coffees at the bar or the butts alone, start with the mortgage, telephone expenses, food …
Usually the most relevant expenses are those for the house , for food and for mobility.
Unlike what you think, these are expenses you can work on.
Indeed you must act if you do not want to find yourself elderly without money to maintain your standard of living.
Why do you need to protect yourself from risks?
In financial management it is always essential to understand what risks are run.
Do not think that you are not taking any risks because you are an employee, perhaps in the public sector.
The permanent job no longer exists and in any case there are other risks connected to your person.
Today we talk about human capital to identify the value of a person, related to his studies, to the skills he matures, to the activities carried out …
In every moment of your life you risk compromising your human capital.
That’s why I advise you to carefully evaluate the insurance solutions that guarantee you a certain capital in the event of accident and illness. If you have a family, also consider the importance of a life insurance policy.
In any case, remember that insurance is not enough and good risk management is essential if you want to optimize the management of your finances.
How much do you need to save?
I don’t think there is an exact amount you should save.
I believe in the importance of a financial plan, that is, in identifying future expenses and identifying the best financing methods.
However, it is not always easy to predict what your future needs will be.
Here is a common sense rule , a thumb rule.
In fact, there is no magic rule on how much you should save, but, at least at a young age, I always recommend saving 30% of your income.
I know it may seem like a lot, but if you apply it consistently in a few years you will find yourself a good capital with which to better manage your future needs.
When I think of my savings, I always think to my tab She savings and how even small numbers are important, even if you are the big numbers that really allow you to turn.
What to do with the money saved?
The money saved is used to:
- finance future spending needs;
- generate new revenue.
Money generates money. This is why you will often hear that money always goes to those who already have money.
By accumulating assets you can in fact obtain a return by making your money available to other parties.
If you want to generate new investment income you will have to make two choices.
The first is related to the duration of your investment.
The second, on the other hand, is connected to the risk you intend to bear.
Remember that the younger you are, the more you can afford to lose part of the invested capital.
As you age and your assets grow, you should differentiate your investments as much as possible, favoring the safest ones.
Today the tools available to the investor are really many and even with a few euros you can enter sectors that were previously foreclosed.
When evaluating an investment always consider:
- the seriousness of those who propose it to you;
- expected returns;
- past performance;
- the degree of risk associated with the investment;
- the explicit and implicit costs associated with the investment.
Never invest in what you don’t fully understand and always be careful because large financial groups have not always been honest with small savers.
Is it worth getting into debt?
In life you will sooner or later get into debt.
To buy a house or a car, we have all done it sooner or later.
In corporate finance they even teach that it is better to get into debt if you are able to obtain a return on the borrowed capital that exceeds the cost of interest.
It is the famous leverage effect.
I advise you not to apply this principle to your personal life.
Never get into debt easily and always repay your debts as quickly as possible.
In particular, it is not advisable to have debt if rates are high or if there is a risk that rates could rise.
In any case, it is normal to resort to debt.
Just do it very carefully and try not to end up in addiction.
In particular, you must keep the rates at a low and acceptable level and the monthly payment within a very low share of your income.
If you can, however, especially in the early stages of your life, do not get into debt, but try to generate income and save.
Can you do everything yourself or do you need a consultant?
I think in the financial field, with good knowledge, you can handle the process yourself.
Today there are a thousand apps and many tools to help you keep costs, investments and your financial profile under control.
Obviously everything needs time and dedication.
So, if that’s not your thing, you can also hire a financial advisor to help you manage and automate the process.
But be careful not to blindly trust those who offer you too complex services or the thousands of local and international (para) gurus
Be wary of those who offer you bizarre investments such as forex trading, the purchase of gold, diamonds, a plantation in South America or a snail crop …
Stay anchored with your feet on the ground and always try to evaluate with a critical eye what they offer you.
The money is yours.
Never stop studying and learning new concepts.
Read a lot both blogs starting with this short selection of personal Insurance finance blogs and books.
I try to devote a lot of time to studying and reading and I must say that it helps a lot.
However, even in this case, never take what the authors tell you at face value.
Practice, experiment, and see if the recommendations work for you.
Only in this way will you be able to improve the management of your finances.