Personal financial management

Personal Financial Management (PFM) is a term used to refer to many ways of managing personal finances. But PFM is also a term used in software that tells you various ways of managing your finances. Now personal finance is not only about your day to day finances but consist of your financial future. The sooner you learn to manage your finances adequately, the better your future financial prospects will be. To manage your personal finances, we first need to understand them and then identify the opportunities to improve them. This understanding helps you to draw a line between your current budget and later financial goals.

There are mainly five areas of personal finances:

Income: It is the foundation of your finances and includes all areas of cash flow. It includes your salary, pension, bonuses, hourly wages, rental properties and dividends. Income can be considered as the first step to your finances roadmap.
Spending: It includes the money or expenses that an individual incurs related to services and goods that are consumable. Common sources of spending are rent, travel, mortgage payments, taxes, food and entertainment. Spendings are categorized into cash (paid by cash) and credit (paid by borrowing the money). Controlling your spending can allow you to have financial growth.
Saving: Savings include all the money that you set aside from your income for future purposes. It is normally the surplus that the person attained from their income after spending on essential products and services. Managing these savings is the critical area of personal finances.
Investing: Investing refers to purchasing assets that are meant to generate a rate of return with expectations of getting more than the principal amount invested over time. It may include mutual funds, bonds, stocks, real estate, commodities, art. But investments carry risk too as all assets always do not produce a positive rate of return. Thus managing the finances through investment is the game of risks and returns.
Protection: Personal protection from financial or physical risks is provided in terms of different products such as annuities, life and health insurances. This is a complex area and people usually seek professional advice to protect themselves from any unforeseen event.

Fundamentals of finance management

Know your take pay: One should always be aware of the exact figure of their income to control any unnecessary spending like a credit card, any debt or car loans.
Know your financial goals: One should be aware of their financial goals in order to gain financial independence. Your short term goals such as buying a new phone should be distinguished from long term goals like buying a house.
Budget, Budget and Budget: Nothing is more important to manage your finances than to have a proper budget. Make a monthly budget by including your monthly spending habits and monthly take-home pay.

While making a budget, take into account your necessary spending, unnecessary spending, savings and investments. Different budget schemes are available nowadays such as:

70-20-10 budget: 70% of monthly income allocated to spending, 20% to savings and 10% to give. Now, this budget scheme is normally considered by people who are at the beginning of their careers as they have more spending.
50-20-30 budget: 50% of your monthly income for essential spending, 20% for savings and 30% for everything else such as subscriptions, restaurants, clothing e.t.c.

There are many such budget options like the envelope system, 80-20, it really depends on you which suits your needs the best.

Emergency money: Always set aside some money for emergency situations before paying your bills.
Remember the rule of 72: Rule of 72 is identifying the interest rate of your savings and then dividing it from 72 to know how many years it will take to double your principal amount.
Never borrow what you cannot repay: Make sure that whatever amount you borrow you are able to pay it off. This will improve your credit and also manage your debts.
Compare interest rates: When it comes to putting your money into a savings account, always compare the interest rates offered by various banks and schemes before committing to a single scheme for maximum profit.
Cut back on recurring charges: We often pay for multiple services that we seldom use. So be aware of the subscriptions that you take and try to limit on those that you never use.
Investment strategy: You have to come up with an investment strategy in order to grow your finances in less period of time but always remember that high returns mean high risks. So go through various investment plans, check out the risks involved, don’t be afraid to seek professional advice if needed but make the right choice.

Personal financial management

There are mainly five areas of personal finances:

Fundamentals of finance management

References