Why is Personal Finance Important? - Cash Savvy Sis (2024)

So why is personal finance important? Personal finance is one of those things you don’t study in school, and as a result, many people find it difficult to wrap their heads around. I know that the first time that I realized I was solely in charge of my personal finances I quickly felt overwhelmed. However gradually the more financially literate I became, the more empowered that I felt to learn more and take control of my financial destiny.

This post is going to summarize some of the basis of personal finance, and ultimately why I think that personal finance should be important to everyone.

What is Personal Finance?

Personal finance can be defined as the financial decisions that people make in their life, which ultimately affect their net worth. It includes how they save, manage, spend and invest their money to accomplish short-term and long-term goals. A short-term goal may be saving for an emergency fund, or an upcoming trip. Whereas a long-term goal could be saving for a house or even for retirement.

Personal finance is also concerned with high-level financial planning. It tries to answer questions like “What do I want my money to do for me?” and “How can I make sure I’m on track to reach my goals?”

The Key Elements of Personal Finance

There are many different aspects to personal finance. One of the most important isbudgeting. This is the process of creating a plan for how you will use your money, and it can be very helpful in achieving your financial goals. Some people may think that a budget just makes you restrict how you spend your money. However, I have found that when I set a budget, I’m better able to prioritize things that I feel are important to my quality of life. For me, that includes things like enjoying a meal at a restaurant with friends or travelling. Having a budget adds balance, and allows me to incorporate activities that add value to my life, without feeling guilty, because I know it’s accounted for in my plan.

Another key element of personal finance isbuilding good credit. Your credit score is a measure of how likely you are to repay a loan. If you want to qualify for the lowest rates when borrowing money in the future, having good credit is essential. Especially for things like buying a house, or even renting an apartment! The biggest piece of advice I learned here, is to start building your credit early. Get a credit card as soon as you can, but don’t just consider it extra money that you have at your disposal. Instead, only use it if you’re can pay the balance in full at the end of every month.

Investingis another key part of personal finance because it will allow you to plan for your future and grow your wealth over time. Learning how to invest effectively can help you gain financial freedom in the long run. When I learned about compound interest, it was a game-changer! More on this later.

The Benefits of Becoming Financially Literate

Here are just 4 reasons that may convince you of the importance of financial literacy.

You’ll be able to keep more of your hard-earned money!

If you know how to protect your money and make it work for you then you’ll ultimately be able to keep more of it. One lesson I’ve learned is that how much you make is a lot less important than how much you save. You could be making 100K a year, but if you’re spending 110K, then you’re miles behind the person earning 50K and only spending 35K.

You’ll get taken advantage of less.

In modern society, it would be nearly impossible to get through an entire day without having someone try to sell you something. This can be in person or even online through social media. How many advertisem*nts have you come across today as you’ve scrolled Instagram or Facebook? Having a solid financial literacy will allow you to assess these options with a critical eye, and make a more informed decision before giving away your money.

You’ll be more financially secure in the future

A large part of financial literacy is about learning to save money. This may seem difficult in an age where everything is so expensive, but it’s not impossible. If you start early enough, you’ll be able to save up for a rainy day, or retirement. Not being constantly worried about money is a goal worth striving towards.

You’ll be more confident in making important financial decisions

One of the most important things about being financially literate is that you’ll have the confidence to make important financial decisions – such as whether to buy a house or what car to buy. You’ll also be able to make more informed financial decisions.

Being financially literate will help you plan and take charge of your finances – which will give you peace of mind in the long run. Also, it will allow you to lead a more fulfilling life because you can prioritize spending money on things that are important to you. So, start educating yourself today!

Starting with a Plan

Managing personal finances effectively can be tricky, but there are a few basic tenets that everyone should follow:

Have a budget and stick to it.

Creating and sticking to a budget may be the most important thing you can do to improve your financial situation. A budget will help you track your spending and make sure you’re not overspending each month. A budget can help you save money for important things like retirement, a rainy-day fund or even just a vacation.

Make a plan.

Make a plan. A good financial plan helps you decide how much money to save and what goals to focus on first, which can be confusing when you’re just getting started. Your financial plan must be realistic – the more realistic your plan is, the better shot you have at achieving it. You should include all of your income and expenses, as well as your assets and liabilities.

When creating (or updating) your financial plan, you should ask yourself the following questions:

How much money do I need to save each month to reach my goals?
What are my short-term and long-term goals?
How much debt do I have and do I need to pay it off first?
How much do I spend monthly and what should I cut out to save more money?
What resources (such as an employer match) can help me reach my goals faster?
How long will it take to max out all of my saving options, such as a 401k or IRA?
What are my estimated monthly and yearly expenses in retirement?

Live below your means.

Live within your means. This is probably the most important thing you can do, both to avoid getting into debt and to grow financially stable for retirement. It’s also one of the hardest things many people struggle with. People live beyond their means when they spend money they don’t have or use credit that they can’t repay at the end of the term. If you’re living beyond your means, it’s likely that you are just paying the minimum amount due on your credit cards each month. That is not a strategy for growing wealth but increasing debt!

For example, if you have $30k in credit card debt at 15% interest, with a minimum payment of 2.5% of the balance and you decide to only make the minimum payment every month, it will take you 166 months (or 13.8 years) to pay off your debt! It will cost you $27k in interest on top of what you’ve already spent on the original purchase(s). That’s basically like taking a second job for over a decade at a very low rate of pay.

Living within your means is difficult for many people because it requires you to make conscious decisions about what your money should be spent on and to delay gratification, as you’re saving up for something that may not happen until later down the road.

Invest money wisely.

Any money you should be working to make you more money. The hidden gem of personal finance is compound interest. Compounding interest is when you earn money on the money that you invested, not just on the original amount. This means that if you invest $100 now and your investment earns 5% each year, then in 2 years (1 year after investing) your initial $100 will be worth $105 (the same as earning 5% on $105), and in 5 years it will be worth $116.25 (the same as earning 5% on $116.25).

The sooner you start investing, the more time your money will have to grow through compounding interest.

Stay disciplined with your spending.

It may be difficult at first, but start small. Following these simple tips should help you stay on track and make the most of your money.

So Why is it Important to Learn About Personal Finance?

So why does money management top the list as one of millennials’ greatest dilemmas? It’s caused by the lack of education that is provided for personal finance. Living on a budget, saving for emergencies, and accumulating wealth (the art of using your income to make more income). Without proper understanding or guidance on how to handle money matters, many individuals struggle unnecessarily.

However, with proper guidance and education, each person can learn to harness their financial power and take control of their money and ultimately become financially independent.

How Does Someone Become an Expert in Personal Finance?

Without formal education or training, learning about personal finance might seem difficult. To grasp the basics of personal finance, books and other resources are very helpful as a starting point. Books are often written by individuals that have been studying the field of personal finance for decades! These books offer valuable insights on a variety of topics including budgeting, investing and financial planning. One of the first books about personal finance that I read was “Rich Dad Poor Dad” by Robert Kiyosaki. This book was one of the first that helped me change my mindset surrounding personal finance.

If you enjoy this read, here are: “7 Books like Rich Dad Poor Dad.”

Websites such as blogs are also extremely helpful. Facebook groups with large followings can also be a useful tool, as the communities will help support you in your journey to financial literacy. You’ll find that the more you learn about personal finance, the more empowered you will feel to learn more.

No matter the avenue that you choose, I’m excited that you have chosen to explore the field of personal finance and take control of your future today! Hopefully this post you understand the elusive question: “Why is personal finance important?”