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Personal finance is covering money matters that include money in your investments, tax, mortgages, and savings.
You are required to plan all these financial activities, for your personal use in the present and the future.
Personal finance lists all activities and the entire industry which revolves around the same, providing, insuring, and investing opportunities as well.
Personal finance means the way you balance your expenditure and your savings to fulfill your desires while keeping the extra ones at bay.
1. The Five Components that Comprise Personal Finance
1.1. Income
Income is any form of incoming money, it can be salary or wages, any savings, dividends, or any other way of making money.
You might be getting rent, you might make money by selling things, you might even get money from your friends or relatives.
This is the money that you use for all other financial activities like purchasing, investing, or protection.
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1.2. Spending
Spending is the most challenging part of personal finance, this involves all the money that is flown out from your 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 your savings; because you will also need some savings and emergency money for any situation that arrives.
In case of none you will have to borrow money and you will fall into debt.
1.3. Saving
The money typically left after your spending will be your savings.
For a lot of people, there might be no savings because maybe their income and spendings come to break even.
However, there might be cases where the income and the spendings are far apart but they are not thoughtful enough to save some money and use it for emergencies or invest it into something useful to at least have an interest paid on it later.
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1.4. Investing
Using your money to buy assets like stocks or bonds to get some return on your actual money is called an investment and can be in the form of land, property, or metal.
There is risk involved in the process, usually due to less understanding and less knowledge. However, with some readings and help preferably professional, you can make smart investments to help you in the long run.
1.5. Protection
Using your money to protect yourself from any extreme situations like extreme illness or a huge natural calamity is what comes under protection.
It is money saved for your well-being and hard times, usually in the form of health insurance or retirement plans.
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2. Skills Required for Good Personal Financing
2.1. Create a Budget for your Income and Expenses and Strictly Follow It
Once you have clarity of all that is incoming and outgoing make a clear outline, with borderlines for every aspect, and make sure you stick to it throughout the year.
Keep a check on your expenses, although it will be easier because the money allocated for all activities will be panned out and you will know where you are overspending or where you can save extra. It will help you be prepared always for any mishap.
2.2. Cut Down on Debts
Try not to accumulate any debts at all in the first place. However, in case of any emergency, if you did borrow any money from the bank or any individual, make it your goal to pay it off as soon as possible.
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.
2.3. Use your Plastic Money Wisely
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.
2.4. Future Planning
Always try to save money for the future, you have a long way ahead and this is the foundation step to gain financial stability.
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Try saving always, the amount may be small initially but you will instill a habit and that will take you a long way.
Be prepared for your retirement and anything major that you want to achieve economically. Start small but start soon and stay steady.
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.
You have to realize that debt is the most dangerous thing to happen to you financially and have been cases where people have committed suicide just because they could not pay back their debts.
Always make sure that you 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 you but you have to draw a clear distinction between what is and what is not necessary and spend very wisely.
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Having debts has another problem when you have to pay back it is not just the principal amount but there is also interest money which is compounded by high interest rates.
It leads you to live paycheck to paycheck, all your money goes into paying the debt along with the extra interest money hence again leading you to a situation where you end up with no extra cash and hampering your financial situation and coming back to square one.
4. Final Thoughts
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.
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