Personal finance is money management where an individual or a family creates a budget for their expenses, savings, investing, retirement plan etc.
Everyone wants to attain financial freedom in their life. They want to be responsible for their own money.
When people become financially independent, they often don’t manage their money correctly and end up in debt to their credit card companies.
Here, personal finance management comes into the picture. It is a skill anyone who wants to learn how to make the best use of their money can attain.
It plays a significant role in an individual’s financial freedom. Living the whole life on paychecks will stress the daily life of an individual.
Any heavy medical bill or financial emergency would burn the entire pocket. The importance of financial literacy is vital for each individual.
Reasons why personal finance management is necessary
We usually spend more than we intend to. Many small expenses accumulate and pile up into a massive amount that we were not aware of.
We shouldn’t spend our money right after we get our income. To gain financial security, money should be managed in budgets.
How and where we will be putting our money should be planned according to our future financial goals.
This way, you would limit your expenses. The saved or invested money will act as a security in future needs.
Increases Cash flow
Keeping track of our expense patterns helps to increase the cash flow. A cash flow statement measures our cash inflow and cash outflow.
Cash inflows include your income such as – salary, interest from saving account, dividends from investments, capital gains.
Cash outflow includes expenses regardless of their such as – rent, bills, mortgage, general expenses, gas.
Keeping note of our cash flow statements is vital as it determines our net cash flow. Net cash flow can be calculated by subtracting cash inflow with cash outflow.
If a net cash flow statement is positive, the individual’s income is more than their expenses.
If a net cash flow statement is negative, it means the expenses of an individual is more than their income.
We should always aim for a positive cash flow statement and look for new ways to increase it.
If an individual has a negative cash flow, he/her should look to adjust their expense and only spend on necessary elements.
Being in debt that can’t be paid off is certainly not a place anyone would want to be. Personal finance educates us on how to manage our debts.
If a debt is not managed correctly, it will hit a massive blow on our future financial appetite. A typical example is in heavy usage of credit cards.
If not paid at the appropriate time, debt from credit cards will add on an enormous amount of interest that might be unmanageable soon.
Knowing how to pay off any debt and to plan accordingly is necessary for every individual.
Growth of assets
Assets are essential for our financial growth. In simple words said by Robert Kiyosaki in his book ‘Rich Dad Poor Dad’, an asset is something that puts money in our pocket, and liabilities are something that takes money out of our pocket.
Personal finance educates us on how to differentiate between assets and liabilities.
This knowledge helps us to make better decisions in what assets to invest in generating a passive income.
Liabilities accompany some assets. With financial knowledge, we can cancel out the liabilities and understand the actual value of our assets.
The conclusion is that every individual who wants to be financially free needs to educate themselves in personal finance.