Personal Finance 101: How to Gain Control of Your Finances

This blog post will provide an overview of personal finance in general and offer some tips for beginners on how they can get started too.

What is personal finance?

The term personal finance is all about how we, handle, save, and invest our money. Managing our finances boils down to our personal habits. Personal finance may refer to the whole area from the individual's point of view or that of the sector that provides financial services. It covers managing your money by saving and investing it. It's further broken down into many areas such as budgeting, banking, investments, retirement planning, tax planning, and many more.

As the name entails, personal finance is personal. It's about how we individually manage our money and how it impacts us as individuals. We all have different needs and goals, which means personal finance will look different for each of us.

It's about creating your own personal goals, personal timelines, and personal ways of reaching those goals.

Personal finance can be broken down into three main areas: personal budgeting, personal investing, and personal savings.

Why is personal finance important?

Everyone will need to manage their finances throughout their life, so it's helpful to start early and be prepared. It can be a difficult thing to wrap your head around when you're first starting out, but personal finance is the way of handling your money. No one else will do it for you!

Personal finance can help you:

• accumulate savings for emergencies
• budget and invest your money to meet goals like buying a home or retirement
• develop financial literacy so you know the steps needed in order to take control of your personal finances.

Financial literacy is key and important for everyone to understand. If you don't manage your money, it can drag you down and bring a lot of stress into your life and the lives of your loved ones!

Personal finance is often seen as restriction and discipline, but it's about creating freedom. It's about making the most of what we have in order to make our personal finances go as far as possible while still being able to enjoy life.

Discipline is not such a bad thing; it helps you spend more on the things that bring value to your life. As James Clear once tweeted, "the disciplined earner can be a guilt-free spender".

There's always a price for everything. Controlling your unnecessary expenses will allow you to have more money for the things that actually matter to you. It's about cutting down on things that do not bring value so you can splurge on those who do!

Gaining control of personal finance can be difficult for some because there are many aspects to it, but it's one hundred percent worth it.

There will always be different things competing for our attention, so personal finance is about prioritizing and creating a plan. It's important that you know what your personal financial goals are so that you do not end up chasing the goals of others and make bad financial decisions that may lead to significant financial constraints in the future.

What are the 4 areas of personal finance?

The main areas to be examined include income, spending, saving, and investing. Each of the main areas will be examined in more detail below. This post looks at how these areas affect your personal financial situation and how the role your money plays across various areas of your life.

1) Income

Income refers to a person's source of cash inflow that they then use in some way. Income is the first step to personal financial planning - it can be used for savings, spending, or investment purposes. Gaining control of income and prioritizing according to personal goals will be helpful on your path towards personal finance!

2) Expenses/Spending

Spending refers to the personal spending that an individual does over a course of time. Personal spending is a personal decision and every personal spending decision will have a personal consequence. Personal spending is personal because it comes down to preferences, values, and needs of the person at that particular point in time.

For example, someone may spend $1000 on accessories for a brand-new car, while another person might spend $1000 on personal grooming. There are no right or wrong personal spending decisions because each personal situation is unique and different. Again, it's all about what brings value to your life.

The first step to reducing personal spending is to find out what activities you are currently paying for that serve your current needs. Dedicate some time to looking at the personal preferences and values of yourself as an individual.

The majority of most people's income is allocated to spending, and there are two spending categories:  cash and credit. All spending includes all types of expenses related to buying goods and services.

People have more control over their discretionary expenses than their income, which is greater than income, a deficit. Managing your spending habits is as important as your income, if not more.

If your spending remains unmonitored, it'll rapidly creep up and you'll find yourself in a serious financial hole.

There are many personal finance strategies that people can employ to stay within their personal spending limits.

Here are some that may help you with your spending:

- Develop a budget plan and stick with it - consider setting up an emergency fund in case of emergencies;

- Monitor your credit card activity regularly so you know how much money is being spent

- Create an annual personal spending plan for the year, with a list of outgoings and incoming  - this will help you stay within budget restrictions.

3) Saving

Saving and managing money is one of the most important aspects of personal finance, as well as understanding how to create a budget. Savings can also be used to achieve personal goals or purchase items in the future.

Common forms of savings include personal savings, retirement plans, and emergency funds.

For starters, you can save money by using a savings account - this is an effective savings tool for those who are just starting out on their financial journey or have limited savings. A savings account is a personal bank account where you can make deposits to save your money

It’s also important to have an emergency fund saved up for those unexpected moments such as medical expenses and a job loss or a recession.

If you're saving for retirement planning, consider contributing your monthly savings to a TFSA and/or the RRSP as they provide tax benefits and the ability to grow your savings over time.

4) Investing  

Investing is about putting your money in something that either generates interest or provides a return on the investment. It's about making it work for you! Common forms of investing include stocks, mutual funds, index funds, or real estate.

Investing is an important area of personal finance because it can provide a person with more money for their future, or pay off debt and other expenses in the present.

Unfortunately, simply saving money will not create financial independence, investing is the key to truly grow your money and have it work for you.

It's worth dedicating your time to invest so that you know what kind of investment strategies are available to you - get informed by researching online and talking with a professional.

If investing in the stock market intimidates you, consider investing in index funds as they may help you diversify your portfolio and feel less pressured.  Investing decisions are made for you automatically with minimal fees.

Personal Finance Principles & Tips

Discipline

An excellent way to develop discipline early on and accrue retirement savings is by paying yourself first before any other expenses are paid or purchases made.  Prioritize your future self by making a commitment today that when the next paycheck comes in, you’ll automatically put a certain amount of money into savings.

Take Charge of Your Finances

One way to take charge of your personal finances is by tracking all the money you spend and where that money goes - this can be done through a spreadsheet or an app on your smartphone, which will allow you to see what's coming in versus what's coming out. Once you clearly see this, you'll be in a better position to control your finances.

Create a budget

Setting up an effective budget is the first step to discipline and good spending habits - it can help identify where your money goes each month so you know what areas need improvement or more discipline.  It's important to have discipline with your expenses, as discipline is related to discipline when it comes to saving.

Budgeting is a great way to get control of your finances and make sure you don't spend more than what's available per month.  

If you want to be prepared for the things in life that come up, it's important not to overspend and to know where your hard-earned money goes.

Having a budget will help make sure that whatever happens - whether it's an emergency or just because of your spending habits and needs- you'll have allocated money ready so there won't be any surprises.

Using the 50/30/20 rule will give you an idea of what to budget for.

The 50/30/20 rule is a budgeting guideline where you spend:

• 50% of your income on things you need
• 30% of your income on things you want
• 20% of your income on savings

Plan and save for retirement

One area that is often overlooked and underappreciated is retirement plans - retirement planning plays a huge role in your future financial security. It's never too early to start planning for retirement.    For retirement planning, you can save money by contributing to a TFSA and/or the RRSP.

It's worth it to invest in your retirement because investing will provide more income for retirement than simply saving money would do - this is the ability to grow your portfolio with stocks, mutual funds, or index funds.

Use credit cards wisely

Your credit card can be your friend or your worst nightmare. A credit card can provide you with some peace of mind when it comes to purchasing items online or traveling, but also put your finances in jeopardy with credit card debt.

It's important to use credit cards wisely because they can offer some perks, such as earning points for flights or hotels. But, credit cards can also lead you into debt if used carelessly and without discipline - it is recommended not to carry a balance month-to-month on your credit card.

You should never spend more than you can afford to pay off at the end of each month.

Think of your credit card as a tool for convenience, not an excuse for irresponsible spending habits.   You have the power in your hands - if you're disciplined with credit cards and use them wisely, it could lead to a powerful financial strategy that will help you earn more with your money and grow your credit.

It's important to know how credit cards work so that you can use them wisely in order to take charge of your credit score - credit can help you qualify for mortgages and loans when you will need them in the future!

Create an emergency fund

It's natural to want everything now and have no emergency funds put away, but it’s best not to live life on the edge - an emergency fund is necessary for financial security because it may save you from the surprises life has for you!

An emergency fund can be used when you encounter a sudden drop in income or unemployment as well as times of illness or family crisis. It's not a matter of if they will happen but when they will happen. So it is important to be prepared for them.

It will provide you with peace of mind when emergencies do happen without having to worry about how you'll pay for it, and emergency funds can be used to avoid increasing your debt by taking loans to pay for emergencies when you do not have a fund.

It's recommended to keep emergency funds in a high-interest savings account so you can withdraw your money whenever you want while earning interest with no risk of losing your money.

Creating an emergency fund is worth the sacrifice of not spending on other things because you can't know when something is going to happen!

Limit debt

Debt is important to limit because it can lead you into a cycle of debt.  It's important to know about debt so you can avoid the mistakes that lead people into debt.

The important thing is knowing the difference between necessary and unnecessary debt so you can minimize bad debt.

Good debt is when you borrow money to invest in something that will grow your assets and increase the overall value of a present asset such as taking a mortgage to buy a house.

Bad debt, on the other hand, refers to borrowing for expenses that do not increase or even decrease in value as time goes by such as taking out loans just so you can buy things you don't need or follow the latest trends!

One way debt can be limited is by budgeting. Budgeting helps ensure that you don't spend more than you make.

It may not seem bad at first, but debt can rapidly creep up and lead to a cycle of debt.

Before you know it, you're living paycheck-to-paycheck, and this means there's less money left for things like food, rent, fun, or anything else that is necessary for day-to-day life or following your dreams!

The Takeaway

There are a lot of articles out there that talk about personal finance, but it's not something you can find in one place. It's hard to know where to start or what the "right" answer is. Wherever you need to start is where the journey begins - give yourself some time and space to get started!

This blog post was an introduction to what personal finance means for your own life. Start small by creating your own goal and ways of reaching that goal. Then go from there! Whether your goal is saving money, building an emergency fund, or just quitting debt once and for all - personal finance really does come down to doing whatever works best for you. The key here is getting started in the first place.

‍