Personal finance can be an abstract term. It covers earnings, savings, spending, budgets, investments, and financial protection and generally involves the way we manage our money. Under this same umbrella, you may also hear the term personal finance, which refers to people and industries that help individuals manage money. It can sometimes feel like the answer to every financial issue or question is to have more money. But, realistically, this isn't always possible. While higher earnings help, it's also crucial you understand how to manage your money effectively so you can get more from what you have.
Personal finance can be an abstract term. It covers earnings, savings, spending, budgets, investments, and financial protection and generally involves the way we manage our money.
Under this same umbrella, you may also hear the term personal finance, which refers to people and industries that help individuals manage money.
It can sometimes feel like the answer to every financial issue or question is to have more money. But, realistically, this isn’t always possible. While higher earnings help, it’s also crucial you understand how to manage your money effectively so you can get more from what you have.
Sturdy financial knowledge will allow you to make smarter decisions to achieve your financial goals without adding further pressure. The better your understanding of your personal finances and money overall, the less likely you are to fall victim to bad advice and the more you will be able to take actions that benefit you.
There are financial courses that aim to improve your knowledge of finance, but you can also find a lot of helpful information online and for free.
Before we dive into more detailed advice, you should be aware of some of the critical strategies involved in personal finance. These include budgeting, saving (including creating an emergency fund), careful use of credit cards, paying off debts, and putting money towards a retirement plan.
Why does personal finance matter?
People living in the UK are currently experiencing a cost-of-living crisis. There is no avoiding the fact that bills and daily necessities are going up in price while UK wages are failing to meet the rise. These circumstances are a considerable cause of stress in many households.
Right now, debt is on the rise. People in the UK owe approximately £1.8 billion, with the average household in debt of £64,970. Improved financial understanding and discipline could help decrease this number and allow more people to reach their money goals.
Having your personal finances under control will help you manage the situation without putting yourself or your finances under further strain. Of course, even excellent management of personal finances won’t solve the wider issue, but it can ensure you are better equipped to deal with the circumstances at hand.
Top personal finance strategies:
While managing your finances can be somewhat complicated, there are strategies you can use to enhance your financial situation.
Get to know your income
Whether from a primary job or a side hustle, you need to know how much you make. You may find it helps to look at how much you earn monthly, weekly, yearly, or even daily to get a better idea of what your income equates to. We advise you only look at your after-tax pay, so make sure you calculate and detract your estimated taxes if they are not already deducted.
Create a budget
Most importantly, you should be spending less than you earn. But budgeting well for personal finances is a little more complicated. The 50/30/20 budgeting strategy is one of the most popular, and for a good reason.
With this method:
- Half of your income goes towards essentials. These will include your rent or mortgage payments and any other unavoidable bills for things like food.
- 30% of your income then goes towards spending. This could be for anything you like, including eating out, shopping, or even charitable donations.
- Finally, the remaining 20% of your income goes into savings. This could be into an emergency fund, or if you already have this, it could go towards longer-term saving goals like investments or retirement.
Having and sticking to a strategy like this helps maintain your life, enjoyment, and future. There are even budgeting apps available to assist you in planning out and visualising your budget.
Smart budgeting apps can make organising your incomings and outgoings far simpler. Budgeting apps allow you to take a hands-on approach to money management.
As suggested above, a saving goal of 20% of your income is good. However, depending on your income and outgoings, this is not feasible for everyone. It would be best if you aimed to put away between 10 and 20% of your monthly after-tax income or as much as you can reasonably spare.
Aim to continue saving this amount until you have between 3 and 12 months of expenses. This emergency fund can be used for any unexpected issues, from an injury that prevents you from working to a broken-down car that needs repairing or replacing.
Once you have your emergency fund, you can move on to putting that 10 to 20% into longer-term investment and savings pots.
Pay down your debt
Some debts are less urgent than others. You should aim to pay non-advantageous debts (ones that don’t offer you something in return first), like credit cards, car loans, or even student loans. It would be best if you also prioritised debts with a higher interest. If you can pay the principal loan amount faster, the interest will be less, and you will have to pay back less overall.
There are various insurances on the market, from life to home insurance and everything in between. These insurance policies offer protection against the unknown. For instance, home insurance can help replace valuable items if your home is robbed and you lose many important possessions.
Or, particularly for those who are the primary breadwinners of their family, life insurance can help protect and provide for your family in case something happens to you, and you can no longer fill that role.
Of course, like anything, insurances cost money. You can’t spend money you don’t have on protection policies. However, you do want to have things in place in case of unforeseen circumstances. An insurance policy can make a massive difference in unfortunate events.
Keep an eye on your credit score
Credit scores are critical for most people and most lifestyles. Without credit, you may be unable to get loans, rental agreements, or even jobs. You must understand why your credit score matters and how you can improve it.
Credit cards are one of the main ways that people can build their credit scores. Unfortunately, credit cards come with certain liabilities. Being able to spend more money than you have is a slippery slope for some, but credit cards are incredibly advantageous for building credit, nonetheless.
You may find that setting up direct debits to pay off credit cards allows you to minimise the stress and risk of forgetting payments. It is also recommended that you check your credit score regularly. This way, you will be able to identify if anything is wrong with your credit score and will be able to fix it before it becomes a significant issue.
Legally, people in the UK must be able to check their credit scores at least once a year for free. However, multiple credit monitoring services (some which cost and others that don’t) allow you to check your score more frequently. The top credit reference businesses in the UK include Experian, Equifax, and TransUnion.
Stay positive when it comes to your personal finance
Personal finances can be overwhelming. There are many things to understand and do, but there are also many online resources you can use to support your journey. You must stay positive and remember you don’t have to do everything at once. Even small changes can help you move in the right direction toward better personal finances.
If you are struggling with getting your personal finances under control, you may want to consider seeking expert help. Various financial advisors can offer you personalised advice to ensure you are tackling your finances in the best way for your situation.