What This Section Will Deal With
In a real sense, all the info on this site is about personal finance, as the goal of all of this is to look to improve your personal financial situation, whether that be managing debt, saving money, investing, buying insurance, and so on.
We’re going to cover all of these topics on this site, anything that affects one’s personal finances, although this particular section called personal finance will speak to financial considerations with managing your everyday affairs, such as making purchases, buying a house, protecting your income and assets, and so on.
This is where the rubber meets the road so to speak, it’s why you save and invest, to be able to buy the things you want, and not have to worry about such things. While people prepare for retirement, perhaps not as much as they should in many cases, to make sure that you have enough money to be comfortable, managing your personal finances is something you need to worry about every step of the way if you want to be successful.
So this section can be seen as addressing the money out component of personal finance, the spending, the purchasing of goods and services not just to serve our financial needs, but to serve our needs period, and doing so with a vision and a purpose toward both the short and long term.
It’s Really All About Managing Our Spending
There’s only two ways to save money, and that’s to either increase your income or decrease your spending. A lot of people tend to focus too much on the income side, saying things like if I only had more money I’d be able to save, and in some cases that might be true, but if and only if they are managing the spending side of things properly.
Now people have different preferences here, as far as how much they discount the future value of money compared to its present value. Modern society is heavily influenced by marketing and consumerism and does like to spend, they do value the present a lot, and this is especially behind all the credit that people seek.
So you can buy something now or defer the purchase to serve various goals, money saved to make up for lower income later in life, or to have a nest egg for a rainy day, or to save money on interest by buying goods with saved rather than borrowed money.
Of course it’s always good to have more income but there’s only so much you can do about this, there’s only so much control you have here. You’d like a raise or would like a higher paying job but this is what you make, and it’s a good idea to look to increase your income of course.
The other way to save is to spend less, and this is something we often can have a significant impact upon. This does come down to how important this is to you, the future value of the saved money compared to the present value of spent money.
We often don’t put enough thought into this though, and it’s certainly true that a lot of people make purchases without enough deliberation, and they may actually prefer to save it but they may be driven by impulse quite a bit, a lack of mindfulness towards the spending we could call it.
So being more mindful towards spending is a cornerstone of successful personal finance management, and perhaps the cornerstone. We need to be aware that saving money is a desirable end in itself, to some degree at least, and when we look to accumulate things to enjoy life more, accumulating money is and should be plenty enjoyable as well.
Managing Large Purchases
The two biggest purchases that people tend to make is buying real estate and buying cars. Generally, the larger the purchase, the more it makes sense to borrow, especially when we can show a financial gain from the deal, like we can with real estate.
If one saved up the full price to buy a home, it would take a very long time, and unless you are planning on living at home for free into middle age, you are still going to have housing costs, you’re going to have to rent, so it’s not that you can just set this payment aside for a couple of decades until you have enough to buy your own home.
Real estate tends to go up over time, and while you are renting, the owner is the one accumulating this wealth, while you are helping him or her to do it by paying off their mortgage for them. So if you can manage to get your own mortgage, you can be the one building the wealth instead, and real estate has proven to be an outstanding investment over time.
People also tend to buy cars on credit, and while in this case it’s possible to save up your own money to buy them, especially if one is satisfied with an older car with a lower sticker price, if one does desire a newer car, and they don’t have the money to buy it outright, it’s necessary to get a loan to buy it.
When we do this though, we need to account for not only the interest cost involved, but the costs of depreciation as well, and the newer the car, the faster they depreciate. This would be reflected in the difference between the price paid and the price you sell it for down the road, and you want to make sure you are getting enough value out of the deal relative to your preferences and needs.
Other major purchases include things like home renovations and paying for your children’s education. Home renovations do offer long term value, as they tend to increase the value of your home to some degree, although they may also involve a premium, and the money spent is not always fully realized in the property value.
Renovations may be required though to make a home livable, or to make it more attractive to buyers if you are looking to sell, but often they are just a matter of personal preference. This is fine if you do see enough value in spending the money, although sometimes people are more whimsical with renovations, and may not give it the proper amount of thought.
Saving for your children’s education should be exactly that, saving, and people have plenty of time to prepare for that. However, some people don’t prepare enough and may end up borrowing for this purpose. Sometimes it may make sense to do so, if your income wasn’t sufficient over the years for instance but it has improved a lot now, where you can afford both the principal and interest now.
Managing Everyday Purchases
A big part of one’s spending is on smaller, everyday purchases, and this involves everything from buying food to purchasing vacations. One may be anywhere from very frugal here to simply carefree, borrowing way too much and getting themselves in a whole lot of trouble.
This all starts by looking at the basic essentials, which are essential and one needs to spend the money on regardless, and then seeing everything else as upgrades which need to be justified according to both one’s means and desires. The means part is the more important of the two, and if one does have the means, then it becomes a decision of whether this is the right way to spend your money versus both buying something else and saving it instead.
Some things are bought outright from one’s income stream, some things are bought from savings, and others are bought on credit. When you want or need something and don’t have the money, in order to get it you have to borrow it.
This does drive the cost of the item up of course and one needs to reflect on whether it’s worth spending the extra money to get it now. Depending on the credit facility used, the cost of borrowing will differ, and the higher the interest cost, the more important it becomes to really need it now as opposed to later.
Interest rates differ a lot, from a payday loan with extremely high rates, to a home equity line of credit with rates almost as low as mortgages. Credit cards tend to be on the higher end, but this depends, and given the ease of the use of credit cards, one needs to be particularly careful with accumulating debt on them, especially the higher interest ones.
Protecting Your Income and Assets
One should also seek to protect themselves with insurance. There are some cases where insurance is extremely wise or even mandatory, a bank won’t give you a mortgage without home insurance for instance, in case it becomes destroyed, and this is not something you want to be unprotected against either.
Purchasing insurance always involves paying more than you expect to get as far as the probabilities are concerned, as insurance companies do make money off these products, and therefore the expected value for the consumer is a negative one, but still one that makes sense.
How insurance makes sense is when it protects you against a situation which is unacceptable, losing your home with nothing to show for it, writing off an expensive car, dying and leaving your loved ones without the means to provide for themselves, and so on.
There are cases where it may not make sense to insure though, where the outcome is one that can be fairly easily handled, for instance if you drive an old car you may only want to buy liability insurance for it, because if you are in an accident it may be easily replaced, and therefore not worth the cost to protect it.
People also will look at getting insurance to protect their income, job loss or disability insurance for instance, to ensure that they can continue to meet their financial obligations in case these events arise. Insurance policies can also be used as a way to save, where you can both accumulate wealth and purchase protection.
In the end, it really is all about ensuring that you do get enough value whenever you spend money on anything, and this does require some thought, but taking the time to think these things out can make a big difference in your life.