8 key elements of personal finance management

If you ask people around you what they think personal finance is all about, they will probably tell you their shopping experience was, how much they spent, and how exciting it is. They might admit some online special deals and how cool all their credit cards look in a wallet.

When you dig deeper, they might mention they can’t afford everything they want, so they use more credit cards and their overdraft frequently. You can also learn about their numerous subscriptions: shopping catalogues, their gym membership, Spotify, Netflix, special offers, clubs, premium products – and the list goes on and on.

There’s very little chance that anyone will mention financial planning, financial life goals, how to protect income against inflation, or how to calculate compound interest.

However, if we don’t manage our personal finance, our life can be miserable. If we don’t understand how finance works and don’t plan for it, then we are in a very serious danger –  danger of being slaves to banks, to businesses who want to us to buy their stuff, and finally to our consumerist lifestyle.

Planning your personal finance and living on a budget can be very difficult at the beginning. Achieving financial freedom is even more challenging and requires you to constantly stretch your comfort zone- and buying stuff is easy, quick and exciting.

As Manoj Arora, an author and financial coach, put it: “You do pay a price for your Financial Freedom, but it is far less than what you would pay for a lifetime of slavery.”

In order to get rid of debts, increase earnings, achieve financial freedom and live a happy life, you need to be a master in personal finance management. If you have not yet tried to master your money, let’s start with the eight elements of personal finance management. If you want to be really good with your money, you need to have a better idea of what personal finance actually is.

1. Budget. It’s like a sat-nav. You know where you are, where you’re going, and how much time it will take to get there. You know also where you’ve started and where you can potentially go, and what the other options are. Thanks to having a budget, you can control your life and are able to make the best possible financial decisions.

2. Income. You can generate it from doing one or more jobs, running one or more businesses, or making one or several investments. You need to have a deep understanding of how income can be generated, how to multiply the stream of money into your bank account, and how to properly manage the energy of money.

3. Savings. Developing a high financial IQ starts with the habit of saving your money.  You can’t do a lot with your money unless you are able to save for future goals.

4. Debt. Regarding the nature of modern money, every one of us is either in debt, has been in debt, or (in all probability) will have debts in the future. To effectively manage debt, you need to understand what the difference is between good and bad debt, how modern money works and how to use compound interest to your advantage. At the same time, managing debt is also a matter of understanding how money works, and how good you are at managing your emotions.

5. Spending. If you don’t control your spending, then you don’t control your money at all.

6. Taxes. Whenever you plan your finances you should always take into account taxes. Most of the time, taxes are inevitable. However, you might have full control over how much you pay and when.

7. Insurance. Quite a big part of things that happen in our life are unexpected events. You cannot fully prepare for the future if you don’t take out insurance.

8. Investment is the crown of personal finance. Investing is the beginning of multiplying your money and achieving ambitious goals.

Planning your personal finance brings a great deal of clarity to your life. It can help you understand what your long term goals are; your ideal lifestyle and ambitions.

Financial planning will also save you a lot of money, help you get rid of debt, give you peace of mind and stimulate the development of an abundance mindset. Most financial advisors emphasise the importance of not only thinking rationally about finance and knowing financial engineering, but also adopting an abundance mindset which helps us take bold entrepreneurial steps and reach ambitious financial goals.

Andrzej Manka