Personal finance is the self-discipline and control a person has to exercise over his/her money. It usually is not easy to achieve the necessary self-discipline and if we do it becomes even harder to stick by it. However, there are various fundamentals and principles that if properly utilized, can act as a guide towards achieving proper and lasting personal finance and also help reduce your financial stress to a large extent. They will be discussed in detail here and in a series of articles to follow. They are:-
Paying yourself first
This model was introduced by George S. Clason in his book The Richest Man in Babylon. He teaches us how to handle financial pressure by breaking down our income into four main categories as follows:-
- 10% Give
This can be achieved through the use of charitable organizations. It gives one a sense of satisfaction in that you have created value for other people. Moreover, you are motivated to find ways to put back what you take out.
- 10% debt reduction
Money in this category is put toward paying up outstanding or long-term debts such as mortgages, credit card debt, car loans, and many others. A point to note is that the money should be put towards the principal amount of the debt and not the interest payments.
- 10% capital
Capital should be invested in areas such as businesses, real estate, stocks, oil, gas, in order to generate more in passive income.
- 70% live
This category is used to cater to all other expenses such as rent, household bills, and also interest payments on the loans.
Value your time
This is the process of working smart and not hard by leveraging both time and money to create more of both. By leveraging, we enlist the help of other people and systems instead of doing everything by ourselves and this frees up our time and money to do the things that we love. Some ways to leverage time can be; outsourcing work to other people or professionals, using technology, assigning roles and tasks, delegating duties and many more.
Ways to leverage money include; borrowing money to invest in areas such as real estate, businesses instead of using your own money. The bankers are always there to help and are our friends.
Set financial goals
Goals have to be desirable, specific, precise, definite, realistic, and achievable. This makes it easy for one to focus all his/ her energy and thoughts towards success in attaining the desired goal. Financial goals can include the desire to invest in property, desire to start your own company, desire to start investing in the stock market, and many more. All you have to remember is that your goals have to be Desirable, specific, precise, definite, and realistic in order for you to achieve them.
Have an emergency fund
An Emergency fund should last between 6months and 1 year. It’s used as a security measure in case one loses his/ her primary source of income or your areas of investment are not performing according to your expectations.
Track your income and expenses
This model is ideal since it gives an overview of where your money is going. You can achieve this by preparing a personal balance sheet and income statement. A balance sheet shows your assets and liabilities and by deducting your liabilities from your assets you get your net worth. NB: only include real assets such as businesses, real estate, stocks, mutual funds in your balance sheet since they give you a true picture of where you are holding your wealth.
An income statement on the hand gives you an account of your income and expenses. Income includes sources such as interest on savings, rent from the property you own, dividend from stocks, business income to name but a few.
These 5 simple steps will be the stepping stones on your road to successful personal finance and financial planning.