The term “personal finance” refers to money management and future planning. Every financial activity and decision will affect your financial health. To achieve optimum financial health, someone needs to consider personal financial planning as a pathway and measurement. There are some unwritten rules that you can follow to achieve lifetime financial health. Here are five of them that you should be aware of!
Do the math
Maintaining the balance of your income and outcome is the most basic rule when talking about personal financial planning. Instead of letting your intuition lead all your finances, stepping deeper into the details would help you understand your current financial health and determine how you reach your short-term and long-term financial goals.
Calculate your net worth by listing what you own and what you owe, then subtract the owe from your own. The result, which is your net worth, represents your position financially. It allows you to analyze your progress, highlight your achievement, and identify what you need to improve.
Resist unmindful spending
What you want is not always what you need. To try and maintain good financial health, it is necessary to identify what you need and what you want. You may find that there are some unnecessary expenses or unhealthy spending habits. This rule will bring significant changes to your lifestyle, along with the improvement of your financial health.
Maybe, you have a terrible habit of spending money without further thinking. You just buy something only because there’s some money in your wallet. You may not believe that your spending affects your current financial position. Moreover, if you calculate your unmindful spending for a month, you will find that the number is quite good if you save it up. Identifying this spending is a giant leap of faith into dealing with your bad financial habit.
Start saving early
Having a retirement plan is a part of good personal financial planning. It will include saving as a method to compound your earnings. There will be some amount to spare monthly for the savings. If you start saving early, then you will gain more through the power of compounding interests. On the flip, you will earn less if you start saving too late.
For an illustration, let’s assume that you need RM1 million when you turn 60 for your retirement plan. If you start saving at age 20, you only need RM655.30 per month. However, if you take your savings when you are 40, it will cost more than RM2,400.
Build and maintain an emergency fund
No one wants to have an accident. But if it happens, having a buffer to cushion the impact and effect helps mitigate the potential financial fallout. The primary purpose of an emergency fund is to help you pay the bills of something you are not normally included in your budget. Expenses that are not usually there, such as car repairs after an accident, will be covered. This fund can also become your primary source of everyday necessity if your income is interrupted by an illness or injury that prevents you from working or maybe when you lose your job.
The guideline is to set aside three to six months worth of living expenses in this emergency fund. However, it will be far better if you aim to save at least six months in today’s uncertain economic environment. You need to remember that emergency backup is an ongoing project, so you had better not stop it even if your target is fulfilled. Having more funds in the event of an emergency than what you can expect is better.
Take control of your financial situation
You are the master of your assets. It means you can also take control of your financial situation. As you understand your real-time financial position, you know when you have to invest your income into something profitable. You may have read many articles about how to spend money wisely, but it will be a waste if you don’t commit to doing it.
Personal financial planning can be an excellent tool for gaining financial success. However, it’s essential to think about the bigger picture spanning the long-term time horizon and start doing habits to make better financial choices. This can lead you to better financial health. Making those rules regular parts of your routine can help you control your money better while achieving your financial goals.
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