Everybody has to deal with personal finances to a certain degree. This is important to ensure you have enough money to pay for your basic daily living expenses. It will also help you in securing adequate capital to provide yourself an acceptable quality of life during your retirement years while also leaving generational wealth to your heirs.
The following are the basic areas of personal finance that you need to pay attention to.
Income
The first thing to consider when analyzing your personal finance situation is your income. This includes all of the funds you bring in that are used to pay for living expenses and which you can allocate to investments and savings. You can derive income from your wages, salary, dividends as well as other sources of money.
Expenses
All the ways you spend your money are included in expenses. This will include rent or mortgage payments, food, hobbies, groceries, entertainment, home repair, traveling, payments on debt and more. Keeping track of expenses will help you make sure you do not spend so much that you end up in financial distress or hurt your endeavors to reach your financial goals.
Savings
Income that is remaining after paying for your expenses is your savings which should be accumulated in case you have to deal with emergencies or large expenses. Although it can be challenging to not spend all of your income, it is important to put away at least a part of your monthly income towards savings in order to deal with any unexpected changes in income and expenses. It is recommended to have at least 3 to 12 months’ worth of expenses in your savings account.
Investments
These are financial assets that you use your money to invest in to earn a return in the future. This can include stocks, bonds, Certificates of Deposits (CDs), money market accounts or various other types of investments. You should be aware that there is always some amount of risk associated with any type of investment. Some investments provide larger returns than others while it is possible you may even incur losses. Therefore, be sure to fully research any potential investment.
Protection
This refers to actions and precautions individuals may take to provide protection against unexpected circumstances such as accidents, sickness, and even death. For example, you may purchase health insurance just in case you end up in the hospital for an illness or an injury sustained in an accident. You may purchase life insurance to protect your loved ones or create an estate plan to ensure your assets go to your intended heirs.
Developing a personal financial plan
Taking all of these aspects into consideration will be necessary for you to create your own individualized financial plan. This will help guide you in making financial decisions in order to further you along your path towards achieving your financial goals. However, this can be a complex and challenging endeavor for those without the right knowledge and expertise. Therefore, it may be a good idea to obtain the assistance of a professional financial advisor.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.