Why is Personal Finance Dependent upon Our Behaviour?

Many of us are worried about our investments, taxes, mortgages, and savings. But as we grow, we are all required to plan all these financial activities, for our personal use in the present and the future.

Here is the thing though – for each one of us, insuring, and investing opportunities differ. At times, they are dependent on our behaviour. For instance, the way I balance my expenditure and my savings to fulfill my desires while keeping the extra ones at bay.

1. Five Things Comprise Our Personal Finance Behavior 

Income is any form of incoming money. I could get it for the work I do, or for my savings, dividends, or even the stocks I own.

I might be getting rent, or I might make money by selling things. I might even get money from my friends or relatives.

This is the money that I use for all other financial activities like purchasing, investing, or protection. 

And I could spend the money I earned – and this too is part of personal finance. This involves all the money that is flown out from my income, for any reason like shopping or groceries, rent or leisure, travel or entertainment.

The key to remember here is that the spending can not exceed my savings. This is because I will also need some savings and emergency money for any situation that arrives.

And if I don’t have enough to cover all my costs, I will have to borrow money and fall into debt. 

Should I have some money left over, I will always have it in my savings. Unfortunately, for a lot of people, there might be no savings because maybe their income and spendings come to break even.

However, I have seen cases where the income and the spending are far apart. Like I had this friend who had a lot of money coming in each month, but wouldn’t save it for emergencies or invest it into something useful. He would splurge it all out.

But you should be looking to invest at least some of the income that comes in. I use money to buy assets like stocks or bonds to get some return. This is called an investment and can be in the form of land, property, or metal.

This is where personal finance strategies come in since there is risk involved in the process, usually due to less understanding and less knowledge. However, with some readings and help, we can make smart investments to help us in the long run.

We could, for instance, use our money to protect ourselves from any extreme situations like extreme illness or a huge natural calamity. That’s because we all need to save money for our well-being and hard times, usually in the form of health insurance or retirement plans. 

The Icy Whiz team talked to David Brillant, Founder of Brilliant Law Firm, about strategies individuals should adopt to manage their finances. Here is what he said:

“As a full-service Tax and Trust and Estate lawyer with a Masters in Taxation and certification in Estate Planning, I’ve worked extensively on both the transactional and litigation sides, managing finances for present stability and future security is my wheelhouse.

One crucial strategy I’ve observed is the importance of establishing a comprehensive estate plan, including a living trust, which provides clear instructions on asset distribution, ensuring peace of mind and financial stability for individuals and their families.

A significant principle to adopt is a regular financial review and updating of crucial documents like wills, trusts, and financial powers of attorney.

For instance, a client once neglected to update their life insurance beneficiaries after a major life event, leading to potential legal disputes and financial instability for intended heirs.

By routinely reviewing and updating these documents, especially after significant life changes, individuals can maintain current and effective control over their financial plans.

Another essential strategy is proactive tax planning to optimize savings and secure future financial stability. Amid legislative changes like those presented in the Build Back Better Act, understanding shifts in tax credits, capital gains rates, and estate taxes can lead to significant savings.

For example, we advised clients to make use of the temporary increase in the unified credit against estate and gift taxes to transfer substantial wealth tax-free, thus securing their financial legacy for future generations.

Regularly consulting with tax professionals ensures individuals are making the most informed decisions to secure their financial well-being.”

2. Skills Required for Good Personal Financing 

I talked to a wealth advisor the last day on how I can improve my personal financing strategy. Here is what he said.

Create a Budget for your Income and Expenses and Strictly Follow It

Once we have clarity of all that is incoming and outgoing we can make a clear outline. We need to do this with borderlines for every aspect, and make sure we stick to it throughout the year.

Keep a check on our expenses, although it will be easier because the money allocated for all activities will be panned out. This way, we will know where we are overspending or where we can save extra. It will help us be prepared always for any mishap. 

The first step is often to cut down on debts 

Try not to accumulate any debts at all in the first place. My personal advisor recommended no credit card debts – ever. However, in case of any emergency, if we did borrow any money from the bank or any individual, we need to make it our goal to pay it off as soon as possible.

This, even if it requires cutting off on a few other expenses. Debt is a vicious cycle, the sooner you escape it the better it is. 

In an interview with the Icy Whiz team, Melissa Cid, a Consumer Savings Expert at MySavings.com, discussed the essential principles for managing personal finances for stability and future security. Here is what she said:

“Being in the finance and personal savings industry, I know that investing for the future, managing debt, and living below your means are three crucial tactics for effective personal finance management. 

Investing for the future is essential because it allows your money to grow over time, leveraging the power of compound interest.

By consistently investing in diverse assets like stocks, bonds, and retirement accounts, you can build a robust financial cushion that will support you in achieving long-term goals such as retirement, education, or purchasing a home.

Equally important is managing your debt wisely. High-interest debt, such as credit card balances, can quickly spiral out of control and impede your financial progress.

Prioritizing debt repayment and avoiding unnecessary new debt are critical steps to ensure that more of your income can be directed toward savings and investments rather than interest payments.

Lastly, but just as important, is learning to live below your means as it is a foundational principle that supports both saving and investing. When you actively spend less than you earn, you create a surplus that can be used to pay off debt and invest in your future.

This disciplined approach not only helps you avoid financial stress but also ensures long-term financial stability and freedom. Combining these three tactics creates a balanced and sustainable financial strategy that can adapt to various life stages and economic conditions.”

Use your plastic money wisely – they are easy to spend and difficult to pay 

I cannot stress on this enough. Borrow only the amount of money that you know you can comfortably pay back.

As is usually seen with credit cards, people get reckless while making expenses and when the payment deadline comes they try left and right to get that money back which becomes a problem.

So, either try to use a debit card or do not exceed the usage of your credit card such that it gets maxed out and you are stuck with long overdue bills.

Tiago Pita, the Brand and E-Commerce Director at Whole Food Earth, talked to the Icy Whiz team about effective strategies for personal finance. Here is what he had to say:

“Firstly, creating and sticking to a budget is crucial, as it helps track income, expenses, and savings goals. Secondly, building an emergency fund to cover unexpected expenses provides a financial safety net.

Additionally, managing debt responsibly by paying off high-interest debt and avoiding unnecessary borrowing helps maintain financial health. Investing for the future, whether through retirement accounts or other investment vehicles, is essential for long-term security.

Finally, continuously educating oneself about financial matters and seeking professional advice when needed ensures informed decision-making and financial well-being over time.”

Finally, future planning is the key to it all.

Always try to save money for the future, you have a long way ahead and this is the foundation step to gain financial stability. I have saved over a $100,000 in my bank account in the last few years, but I would need a lot more than that when it comes to my retirement or even spending on my kid’s education.

Try saving. The amount may be small initially but this will instill a habit and that will take you a long way. Start small but start soon and stay steady. 

We interviewed Alyssa Robert, a Financial and Digital Marketing Expert at Sell House AS IS, about common challenges in personal finance. Here is an excerpt from the interview:

“It’s crucial to address common challenges in personal finance. 

One of the most pressing issues is debt, which can hold back financial progress and limit future opportunities. To tackle this, start by creating a plan to pay off high-interest debts first, while making minimum payments on others.

Another challenge is the lack of emergency savings, leaving individuals vulnerable to unexpected expenses or income disruptions. Combat this by setting up automatic transfers to a savings account each month and cutting unnecessary expenses to build an emergency fund gradually.

 Finally, retirement planning often falls short, with many underestimating the amount needed or starting too late.

Take proactive steps by maximizing contributions to retirement accounts like 401(k)s or IRAs, and consider seeking advice from a financial advisor to develop a personalized retirement plan suited to individual goals and circumstances.”

3. Repercussions of Poor Financial Behavior 

An unplanned financial future will not only create troubles for your present but also lead you to have a very unstable future.

We have to realize that debt is the most dangerous thing to happen to us financially and there have been cases where people have committed suicide just because they could not pay back their debts.

We need to always make sure that we strongly stick to personal discipline. 

Clear and stringent self-discipline about savings, spending, and investments will lead to a stable and secure financial future.

There will always be a thousand things which will allure us but we have to draw a clear distinction between what is and what is not necessary and spend very wisely.

Having debts has another problem when we have to pay back. And hear me out – because this is often what people former. It is not just the principal amount that we are paying here but there is also interest money which is compounded by high interest rates. Like the place I bought for $500,000 – I will have to pay an interest double that over the 25 years because I took a mortgage out!

It leads us to live paycheck to paycheck, all our money goes into paying the debt along with the extra interest money hence again leading us to a situation where we end up with no extra cash. We don’t want that – nobody wants that. 

Jonathan Feniak, General Counsel at LLC Attorney, shared his experience on the value of disciplined financial habits and proactive planning. Here is an excerpt from the interview:

“Through my experience in both the legal and financial sectors, I have come to appreciate the value of disciplined financial habits and proactive planning. 

First and foremost, the power of compound interest cannot be overstated. The earlier one starts saving, the more time the money has to grow. 

Next, it’s critical to diversify your income streams and investments. This means not relying solely on a 9-5 job or a single type of investment. Venture into side hustles, and real estate, or invest in stocks to complement your primary income. 

Always have an emergency fund to cover unexpected expenses. Life is unpredictable, and having a financial buffer can provide significant peace of mind. 

Finally, never underestimate the importance of financial education. Keep learning about money management, retirement plans, and tax strategies, as this knowledge is key to optimal financial decision-making.

On a personal note, patience and the willingness to seize the right opportunity have served me well in entrepreneurship and have steered my financial journey toward long-term stability.”

Our behavior very much defines our finance. Our habits, preferences, and lifestyle choices play a huge role in deciding our financial situation.

If we overspend or if we do not plan enough we might not be able to become financially independent.

It might hamper a lot of other processes in our life, plus we will not be able to live peacefully without any financial security. 

Guest Author: Saket Kumar

Last Updated on June 4, 2024 by soubhik