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Personal Finance

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Why Personal Finance Is So Important

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If you plan on building any type of sustainable wealth, having a strong personal finance foundation to build upon should be at the very top of your priority list. Here’s why:

  • If you don’t have a strong financial understanding, you’ll likely fail to build any sort of sustainable wealth.
  • You can make or even have lots of money. However, if you don’t know how to manage you money properly, you won’t be receiving the maximum benefit from it.
  • In other words, if you don’t build a house with a strong base, everything can easily come crashing down.

Be accountable

The first step in setting up a solid financial base is to first look at the big picture of your income and outgo. How much do you make each week? How much do you spend each week? Are your current expenses more than your current income? What could you pay off? What should you pay off first?

Once you’ve been brutally honest with yourself about your current status, it’s time to start setting some long and short term goals. First, set a long term goal. It could be something like “I want to have my credit cards completely paid off within 18 months”, or something to that effect. Then, you must break that goal down into smaller goals that you will focus on hitting. An example would be “I will pay an extra $100 per month on my Visa card until it’s paid off” or something similar that fits your situation.

Budgeting: A closer look

Until you actually sit down and physically write up your budget listing all of your expenses and income, you’ll probably never really see where your money goes. However, knowing your budget and maintaining a healthy one is paramount to your financial success.

Not only will making a budget shed light on where your money is being spent, it will also cue you into areas where you could spend less money, or cut costs.

How’s your savings look?

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Are you saving enough?

It’s important to have and maintain multiple types of savings. Some money should be set aside for short term unexpected events such as your transmission or engine on your car dying, or the need to buy a new washer or dryer. Other money should be set aside for larger, more long term purchases such as a vacation, new furniture, a wedding, etc. The last type of savings should be a tax deferred retirement savings, in the form of an IRA, 401k, 403b, etc. This savings program should be automated, so that you don’t even think about it.

When saving to pay for an expected expenditure, make sure you keep that money separate, and have a clear goal to be able to hit in time of the purchase. The other types of savings can both be set up on “autopilot” through either your bank system or your employer’s automatic payroll deduction system.

It should be noted that if you are in severe debt, you should focus on getting out of debt first before you start any large savings ideas. However, you should start saving as soon as it’s feasible, even if it’s only $1 a day, and stick with it. You should have roughly 6 months worth of your expenses in a short term savings account. Remember, this is above and beyond all other monies that you are or have been saving for longer term items.

Tips on borrowing money

Here’s the number one tip on borrowing money: DON’T! I know it’s easier said than done, and in some cases, it actually makes sense to borrow. This is mostly true when trying to consolidate your higher interest debt into a lower interest loan.

The second tip is pretty obvious. However, most people don’t think to do it ahead of time, and fall victim to the first bank that they sit down in. This is shop around. There are many different lending institutions today. You certainly don’t have to go with the first bank that will talk to you.

Buying a car?

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If you plan on buying a car, the right car should have a minimal impact on your financial situation. By this, I mean that it should be just big enough. Nothing too large. Smaller cars tend to be better on gas mileage than bigger ones.

Also, some cars are cheaper to insure. You can check your insurance agency for price estimates before buying a car. Furthermore, smaller cars are cheaper to maintain. This is because smaller tires, brakes, and engines are cheaper to service.

Look online to get the best value for your money. Also, try to buy cars that depreciate slower. The old saying holds true. You really do get what you pay for.

What about purchasing a house?

You should always put in at least some thought to every financial decision you make. However, when you’re ready to buy your home, there should be way more thought put into the purchase.

For starters, you really want to make sure that you secure the right type of loan for your home. This can end up saving you a ton of money, since interest on mortgages are usually tens of thousands of dollars.

Secondly, much like buying a car, don’t buy more of a home than you need, or will need in the foreseeable future. This is even more true for houses because the cost to own, live in, and ensure there are properly functioning utilities on a month by month basis for years is relatively high compared to most any other purchase you’ll ever make.

Think this purchase through as much as you can before signing on the dotted line. Things to consider that are sometimes overlooked are:

  • Are you planning on having kids in the future? If so, do you like the school district in your area?
  • How long are you actually going to stay in this home? Is it going to be a “starter”? Or, are you going to be there for quite a while?
  • What are the taxes per year in the area you’re looking to buy your home in? Are there any surrounding areas that could offer comparable quality with less of a tax burden?
  • Does the house match your budget?
  • How large of a down payment will you need?

Insurance: Do you have a backup plan?

The truth is, nobody wants to worry about the unthinkable. However, having a very strong personal financial foundation requires that if the unthinkable happens, not all is lost. This is where insurance comes in.

The things you can’t afford to lose and how to protect them:

  • Your life: life insurance
  • Your health: health insurance
  • Your car: auto insurance
  • Your home: homeowner’s insurance

All of the above listed are absolute neccessities to maintaining your wealth and ensuring continual prosperity and protection of it.