Personal finance is the management of ones money including: budgeting, saving, spending, investing and insuring while taking into account external influences and risks which one experiences at different stages in the personal life cycle.

Why is personal finance important?

Personal finance is important because it can save you from a lot of trouble such as overspending, debt and it can help you increase your savings, take control over your finances and thus put you in a better financial position. It helps you get a hold of your wants and achieve your aspirations.

What does it take to take control over your personal finances?

The way you manage your money can be traced back to your personal values, attitudes and beliefs because these affect the choices you make. Therefore, if you don’t like your current financial position than you must improve on these internal factors. This is because taking control over your personal finances requires a strong mind because you must have the discipline to stay consistent, you must have the self control to avoid impulsive purchases and so on.

Steps to take to improve your personal finances

1. Budgeting

A budget is a tool used in financial planning showing ones income and expenditure over a period of time such as, a month.

Budgeting can provide information that can allow an individual to decide what they can afford to spend on, repay or save, what their financial goals and priorities are and what steps they can take if they are overspending.

The 50/30/20 rule

No more than 50% of your earnings should be spent on needs.

No more than 30% of your earnings should be spent on wants.

And at least 20% of your earnings should be saved. (A tip: spend what you don’t save)

2. Start saving!

Saving can be important for many reasons one of which is it can cover your living costs in an unfavourable situation like losing your income, or it could be used in an emergency like having to replace your fridge. Therefore, saving for an emergency fund can be a good step to take. We do not know when or if ever an unfavourable event is likely to happen but an emergency fund can come to help if this event does take place, however as much as an emergency fund can come in handy 41% of Brits don’t have enough savings to live for a month without income. (Source: https://www.finder.com/uk/saving-statistics
Analysis conducted by finder.com/uk )

Furthermore, your savings could be used to buy something you always wished for like that new car, or phone, saving can also help you achieve your aspirations like going on that luxury holiday. However, even though there are so many benefits of saving not many people actually do it which is evident as 1 in 10 brits have no savings at all . This can be for many reasons including that, some people on low incomes or even those of high incomes might feel that they don’t have anything left at the end of the month to save, they think they simply don’t have enough funds to save.

This is where a cashflow could come in handy, you could monitor your incomings and outgoings to keep a track of your spending which can help you from overspending and help you stay in alignment with your goals. And you could join this tool with a budget to cut your spending on discretionary expenses and in some cases this can also be on essential spending for example, we do need food to survive but some luxury food items are not necessarily a need but more of a want so spending could also be cut on these items. A trick you could use to reduce your spending on certain items is to ask yourself before you buy something if you actually need that item or not, and wait a few days before actually buying it.

3. Credit cards

Credit cards can be a great way to increase your credit score -a measure of your financial health, and a tool showing how likely you are to pay back debts- as you can show your creditor that you are a responsible borrower, however they are also a great way to damage your credit score if not used properly.

If you intend to boost your credit score with the use of a credit card these are a few steps to take and a few things to keep in mind:

-Pay (at least) the minimum payable amount on time

-Don’t apply for too many credit cards

-Use less than 30% of your credit allowance

-Do avoid withdrawing cash from a credit card as this incurs high interest rates

Credit cards can also allow you to get “free” money if you pay back the borrowed amount in full before the due date, this is because in this way you avoid interest, the cost of borrowing in this case.

4. Try to avoid bad debt

There is good debt and bad debt. A loan to start a business could be one considered a good debt and a loan to buy a designer bag which you cannot pay back would be one considered to be a bad debt.

The 28/36 rule

28% or less of your monthly income should be spent on housing expenses. This includes rent or mortgage payments and other home related expenses. And no more than 36% of your monthly income should be spent on debts including loans, credit cards or hire purchase and so on.

A few tips when dealing with debt:

-Always pay back your most expensive debts first, the ones with the highest interest rates. And the ones which can cause serious disruptions to your life if not paid back eg. mortgage arrears which could cause you to lose your home and other priority debts.

-Try to increase your income and/or decrease your expenditures.

-Get free help from charities providing free advice on dealing with debt eg. stepchange, the money advice service, national debt line etc.

-Contact your lender whether it be a mortgage provider, credit card company etc, and propose a repayment plan. They are most likely to work along with you as they’ll try to understand your situation and they’ll appreciate that you are trying to pay it back even though you are having a difficult time.

-Consider getting a debt consolidation loan. This is where all your debts are put into one place and you make one single payment into the “basket” each month which is shared among your debts.

-As a last resort find a debt solution which fits your circumstances such as a debt relief order, debt management plan, administration order, IVA or bankruptcy.

5. Retirement

A couple should aim to save enough to have £25 000 a year in retirement for a comfortable lifestyle. But in general you need 20-25 times your expenses in retirement, therefore if you spend £20 000 a year you’ll need about £400 000-£500 000 in savings for retirement.

Check out my YouTube video about personal finance basics!

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