The term “personal finance” refers to how you manage your money and plan for your future. All of your financial decisions and activities have an effect on your financial health. We are often guided by specific rules of thumb, such as “don’t buy a house that costs more than two-and-a-half years’ worth of income” or “you should always save at least 10% of your income toward retirement.”
While many of these adages are time tested and helpful, it’s important to consider what we should be doing—in general—to help improve our financial health and habits. Here we discuss four broad personal finance rules that can help get you on track to achieving specific financial goals.
- Do the Math—Net Worth & Personal Budgets- As a starting point, it is important to calculate your net worth—the difference between what you own and what you owe. To calculate your net worth, start by making a list of your assets (what you own) and your liabilities (what you owe). Then subtract the liabilities from the assets to arrive at your net-worth figure. Your net worth represents where you are financially at that moment, and it is normal for the figure to fluctuate over time.
- Recognize & Manage Lifestyle Inflation- One of the main reasons people allow lifestyle inflation to sabotage their finances is their desire to keep up with the Joneses. It’s not uncommon for people to feel the need to match their friends’ and coworkers’ spending habits. What is easy to overlook is that in many cases the Joneses are actually servicing a lot of debt—over a period of decades—to maintain their wealthy appearance.
- Recognize Needs vs. Wants & Spend Mindfully- It can be challenging to accurately label expenses as either needs or wants, and for many the line gets blurred between the two. When this happens, it can be easy to rationalize away an unnecessary or extravagant purchase by calling it a need. Your needs should get top priority in your personal budget. Only after your needs have been met should you allocate any discretionary income toward wants.
- Build & Maintain an Emergency Fund- Although the traditional guideline is to save three to six months’ worth of living expenses in an emergency fund, the unfortunate reality is that this amount would fall short of what many people would need to cover a big expense or weather a loss in income. In today’s uncertain economic environment, most people should aim for saving at least six months’ worth of living expenses—more if possible.
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Source: https://www.investopedia.com/articles/personal-finance/11
