In life, it is easy to get caught up in the daily ongoings and forget about the importance of managing personal finances.
Personal finance covers the management of expenditure as per your income. Personal finance also encompasses banking skills, budgeting, estate, and tax planning.
The recent Covid-19 pandemic that hit in 2020 showed the weak points for individuals and families. The weak points revealed were associated with financial planning. The planning could have helped individuals sustain their livelihood even when the pandemic hit.
However, that was not the case. This was evident in a study that revealed that 63% of Americans had their finances affected by the Covid-19 pandemic.
The concept of financial planning is unknown to most Millennials. They often prefer to spend all their income as it comes in. The US government has tried empowering the youth with knowledge of financial management.
This has been done by creating a financial management course in schools. This course is mandatory in 21 states. Though this number does not represent the total number of states in the USA, it is a significant effort towards youth empowerment.
The effort put towards enlightenment of people with finance management knowledge portrays it importance.
In this article, we shall discuss the importance of personal finance.
1. Easy Income Management
The biggest issue when it comes to personal finances across the world is debts. A debt is an amount of money that a person owes. Debts can be owed to a bank, financial institution, a person, etc.
Mastering income management will help a person learn to live within their means and avoid debts. The introduction of credit facilities has proven to be the biggest drawback in terms of income management.
The availability of easy-to-use money has affected the mindset of most people. The credit facilities give their clients prepaid cards that report to the credit bureau. Credit bureaus serve as a security method for the credit company.
More people are signing up for credit services when most do not have planned payment methods. This has led to an increase in the number of loan defaulters across various countries with credit facilities.
Defaulting a loan from a credit facility gives the user a bad credit report. A credit report is a well-detailed report of an individual’s credit history. When a user gets a bad credit report, you can seek the aid of a top-rated credit repair company.
Credit repair companies help to remove negative information from a person’s credit report. The companies use AI-driven credit management in credit repair and analysis. Analysis using AI helps the user to plan the next move. These moves will help build their credit score positively.
2. Financial Security
The greatest benefit of personal finance is the security that comes with it. As a part of financial management, one gets the knowledge on how to save. A well-known method of saving used in financial management is the 50-30-20 rule.
With savings taking up 20% of your income, you know that even during job loss, you will be okay for a while.
The Covid-19 pandemic showed the importance of personal finance. Individuals who took their finances seriously were able to maintain their livelihood. Most people who were not keen on their financial management had to seek the help of credit companies or apply for government reliefs.
3. Cash Flow Increase
Understanding your finances helps in understanding all your income streams and expenditures. Budgeting for your monthly necessities, for example, can help you save cash by preventing unnecessary purchases.
However, the main method of cash flow increase, not known by most people, is tax refunds. Though rare, tax refunds can offer a significant improvement to a person’s finances.
Another method used to improve personal finances is tax planning. Tax planning entails analysing all financial factors and expenditures to ensure that you pay the lowest amount of tax possible.
There are several tax planning strategies that an individual can use. Some of these strategies are:
- Reviewing and writing off of bad debts
- Reviewing of invoice timing
- Asset reviewing
- Making of deductible annual contributions
For good tax planning, you should be aware of the maximum tax credits offered by your government.
4. Asset Management
A key aspect of maintaining and improving personal wealth is the capability to ascertain assets and maintain or increase their value. Asset management equips one with the knowledge to identify the assets at hand.
Asset management also helps to identify asset value for use during sales. Another aspect of asset management is the capability to mitigate risk. Risk mitigation helps to avoid the depreciation of the assets.
5. Retirement Planning
These numbers display the worrying state of the population when it comes to retirement planning. Retirement planning is a necessity that should be taken seriously by all individuals.
Most financial institutions recommend that the amount saved up for retirement should be seven times the annual salary. Though hard to attain for most people, you can opt to use an insurance company that offers retirement planning.
Early retirement saving in life will ensure that upon retirement, you will have attained the recommended amount.
For retirement savings, there is a well-known method. It uses the current age to state the amount to save for retirement. The method’s goal aims to ensure that you save a total of 10x your annual income by the time you retire.
The method has been discussed here.
Everyone should understand that their finances should be a priority for them. In this golden era of internet technology, there are readily available expense management applications. These applications can be used to improve financial management.
The availability of cheap credit repair companies can also serve to help individuals get their credit score better. Getting a better credit score will in turn affect their finances positively.