Personal finance refers to the financial decisions which an individual or a family unit is required to make in order to obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.
In this article, we shall examine the basic rules of Personal Finance that will guide in making financial decisions.
Live Below Your Income
This is the most important rule of all. Any person desirous of achieving financial success must develop a culture of spending less than he earns. This can be achieved by working on either sides of income and expenditure. Either we work to increase our income or we work to reduce our expenses or both. As we work hard on either spending less or earning more, our disposable income will increase. In turn, the later will accelerate our ability to achieve our financial dreams.
Enhance Your Income
As noted above, it is important that we work hard at enhancing our income as a strategy for increasing our disposable income. As people who are working hard at achieving a financially stable life, we must have a clear strategy of improving our income in the short and the long term.
Above can be achieved through getting a better education, establishing streams of passive income, starting a side business, working hard at our current job and other related efforts. As we move from one stage in life to another, our financial obligations will increase. Therefore, it is important that we towards increasing our income in the same progression.
Live a Frugal Lifestyle
Like many other rules in Personal Finance, this rule derives from the rule of living below your income. Not that we really have much choice about living below our income but in credit driven economies, it is very easy for our personal finance to get out of control as a result of borrowings.
Living a frugal life does not mean living a miserable life. Instead, it means living within your means thereby ensuring that you are in control of your finances and not the creditors. It is a deliberate and conscious effort to live within your income with a view to creating an enabling environment for wealth accumulation. A frugal lifestyle enables us to go beyond immediate gratification to having the big picture in mind.
This habit urges us to save as much as possible without making ourselves miserable. It enables us to avoid regrettable expenditures by applying the ten seconds rule. This rule says that every time we want to make a purchase, we should spend ten seconds to ask ourselves if we really need what we are about to purchase. Very often, this simple rule will point us in the direction of spending less money.
Learning to Manage Money
Having gone through the above steps, it is very likely that you will begin to have an excess of income over expenditure. The savings so accumulated is your ticket to financial freedom. At this point, you must learn to channel the excess funds into profitable investments. Money begins to work for you and not against you. As this stage, you must also begin to know the difference between asset and liability. Invest more in assets and pay off your liabilities.
Be in Control
Personal Finance is not about being rich, it is about being free. Freedom from debt. Freedom from stress and worries. It?s about being in control of your finances. And so, the final rule is be in control.
In conclusion, most people spend most of their lives earning money but rarely spend enough time planning the efficient use of same. This leads to a lot of financial regrets. The result is that at age 65, most people are flat broke.
It is therefore very important that we take the issue of Personal Finance very seriously. Our financial well-being is worth some time and effort. If we observe the above rules, it would lead to fuller and happier life.
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Source: http://www.sexyplanet.us/business-finance/personal-finance/the-rules-of-personal-finance.html
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