Poverty, ongoing financial problems, dissatisfaction with life and other negative aspects can often be due to the low level of financial literacy of the population. Now it is not a particular problem to find information on the topic of personal finance, however, even people who are really interested in finance, read various articles and study courses, identify personal finance with money. For them, personal finance is money that people earn and spend, and the more they earn, the more they can spend.
In fact, the concept of personal finance has a broader meaning than money. Personal finance is not only everything related to money, but also its use in accordance with values and priorities. A simple example, in which personal finances are equated with home, will explain this concept to you in a very accessible and understandable way.
Everyone has seen and can imagine an ordinary house. So, the design of any house consists of three main structural parts: the foundation, the wall and the roof. Building a house always begins with laying the foundation – this is its foundation. The strength and reliability of the foundation depends on how powerful and high the walls it can withstand. The house is protected from the weather by the roof. If the weather is clear and dry, then you may not notice how reliable the roof of the house is. But as soon as the weather deteriorates, it rains, or even worse, a hurricane begins, it immediately becomes clear how important and necessary a reliable roof is. Even if the foundation of the house is heavy-duty, and the walls are reliable and high, if there is no roof or it will leak, then the owner will experience constant inconvenience. The roof in the house has protective functions, so it must be made of good materials and durable. A good owner, when building a house on a solid foundation, erects high solid walls and covers a reliable roof. Then he doesn’t care about any weather.
The principle of building a house can be used in the construction of personal finances. Here you can also conditionally distinguish the foundation, wall and roof.
Foundation
The foundation of personal finance is built on financial literacy, life values and priorities, and financial goals.
It is necessary to start building a financial foundation with financial literacy. But this does not mean that it is necessary to graduate from a special educational institution, especially since you are still unlikely to be taught how to manage personal finances. You can improve financial literacy through self-education: study specialized literature, attend various courses and trainings, Internet resources. Currently, this is not a problem. Financial self-education in the construction of personal finances is more preferable than specialized. With specialized education, a person mainly works for an employer, doing certain work and receiving a salary, but at the same time earning money and building a financial house for his employer. Without self-education, you are unlikely to get financial literacy.
You need to answer the question for yourself: who do you want to become, what to achieve in this life and how much time do you allocate for all this. Each person has his own life priorities, and, accordingly, strategic priorities. The financial goal directly affects your personal finances, their formation and spending. This is your kind of financial home, this is the life you dream of in the future.
Wall
Personal finance walls are erected on short-term financial purpose, personal financial plan, sources of income, and personal capital.
Break down the strategic goal laid down in the foundation into intermediate goals. By gradually implementing them, you will get closer to your main goal. Intermediate or short-term goals are a kind of project of your financial house. It should not be difficult for you to draw up a personal financial plan, since you build the walls of a financial house prepared enough, read books, articles and courses, and already know that income, expenses and purpose are its three main components. Your income is the main material for the walls. At the same time, it is desirable that they be diversified, that is, they come from different sources. For example, the main income will act as the main, load-bearing blocks, additional income – as partitions, and non-permanent income – some other small materials. The more passive your income is, the stronger your financial home will be. Don’t forget to keep your expenses under control.
If income plays a creative role in the construction of a financial house, then expenses are destructive. If you spend as much as you earn, then the financial building will not grow, and if more, it will collapse. The amount of personal capital you have collected in this example serves as floor slabs and indicates that one level of the building has been built – it’s time to move on to the next.
Roof
The main task of the roof of personal finances is to protect them from various unpleasant situations, such as a financial crisis. The roof of the financial house is erected not at the final stage of construction, but from the moment the walls are erected, it just gradually becomes taller and stronger with the growth of the walls. It is based on accounting, control, preservation, enhancement and protection of personal finances.
Personal finance accounting can be compared to cost estimates in construction accounting. A house can be built only when full accounting and control of all costs is organized. The situation is the same with the construction of a financial house. Only by organizing accounting and controlling your costs will you be able to achieve financial success. Earned personal finances also need to be preserved, to make sure that they do not depreciate after some time, retain their purchasing power and do not slow down the construction of a financial house. It will be even better if you not only save your personal finances, but also multiply them. You will make them work for themselves and generate new passive income. This will speed up the process of building a house, help you move from level to level faster and complete construction. After you have built your financial house, you need to protect it so that some storm in the form of a financial crisis cannot destroy it. Personal finances, along with insurance, can be protected by diversifying risks. Then, if the storm destroys part of the financial house, the other part will help to quickly restore it.
From the example of building a house, it is clearly seen that if you earn money and just spend, then you can be left without a home all your life, regardless of the amount of your income. Therefore, they need to be planned and protected. This is the only way to strengthen your financial condition and gain financial independence.
Tagged with: Personal Finance
