Your personal finances are something you should always be on top of, particularly in these trying times. With the ongoing financial crisis still very much in the headlines, it has become more important than ever to spend and save money wisely. For your sake and the sake of those who depend on you, you should meticulously track your personal finances to ensure that you are in the best financial health possible at any given time.
Most people think of personal finance simply as the amount they have tucked away in the bank in savings and checking accounts. While this is certainly an aspect of personal finance, it is just the tip of the iceberg. Put simply, personal finance is about the ratio between how much you are spending, and how much you are earning. There are so many factors that affect these two, that managing it is quite complicated, so complicated in fact, that many choose to just live day to day, and not think about it. This is a big mistake.
To even begin to manage your personal finances though, you should at least get to know the four most common products that banks offer to help you manage your money. There are two that everyone knows about and that most people have, these are savings accounts and checking accounts. A savings account is simply a place to put your money when you aren’t using it. It earns interest, but not very much, this is seldom regarded as investment, and typically is just used as a receptacle. Checking accounts don’t earn money at all; they are simply a safe place to put your money, where it can be accessed by issuing checks as payments.
A third common offering is the certificate of deposit (CD). Of the four common types, CDs typically offer the highest interest rates (cd rates). The drawback is that your money gets tied up for a long time, money put into CDs should be disposable, meaning you won’t need if for a long time, in fact the longer you won’t need it the better, as longer term CDs come with higher interest rates. CDs typically come with a minimum term which can be from a few months to a few years. Should you withdraw before the end of the term, heavy penalties will need to be paid. Money market account are a bit of a marriage between CDs and savings accounts, they earn higher interest than saving accounts, but are accessible unlike CDs. On the other hand, while money is accessible, there are restrictions on the frequency and amount to be withdrawn at any one time, and the interest rates are typically not as good as with CDs.
The first thing you need to consider when trying to get your personal finances in order is how much money you are earning. Consider your salary, existing investments, side jobs and any other means by which you receive money. You should itemize each source of income, and make a projection on how long you can expect to earn from each given source. The second step is to compute for your expenditures. Food, electricity, loan payments, investments such as insurance, etc. Knowing these two will allow you to see whether or not you are living within your means, and if needed, to adjust accordingly.
The third step is to make a budget. For most people the practical purpose of a budget is to figure out how to reduce expenses. The objective is to lower expenses enough, to that point where there is still a substantial amount left over for other investments or even emergencies. A budget, no matter how good, will not guarantee success unless you can stick to it. Managing your personal finances is a lot about self-control, it is about sacrificing immediate gratification for a more secure future. With a well thought out budget, and a lot of self discipline, you can achieve your goals.