Understanding your personal finances will help you approach your money in a better way and have an effective plan for the future. We often fail in financial planning and management because there is a lack of awareness around managing personal finances. Thus, it is imperative that you know the key components of financial management in order to successfully achieve financial well-being. Here are the five key components of personal finances:
1. Savings
Savings are very important for financial well-being. You never know when a sudden need for money comes knocking at your door. You might lose your job, or have to pay 1.a hospital bill. To stay on the safe side, you should have enough money in your savings fund to cover the expenses of three to six months. Hence, you must ensure that you save a small amount of money to put into your savings account every month.
2. Investing
Investing is the best way to grow your money. After setting money aside for your savings fund every month, you should have something left to put into your assets like a mutual fund, interval fund, stocks, or bonds. Plus, investing will also help you get rid of your debt. However, if your debt is really bad and you fear bankruptcy, IVA is the solution for you.
3. Financial Protection
As you make financial progress and grow your assets, you need to build a safety net for yourself so that your assets don’t turn into liabilities. Such safety comes from insurance. There are four kinds of insurance that you must have, including term insurance, health insurance, mortgage protection insurance, and personal accident insurance. All of these will provide you with the required security in life, giving you more freedom to expand your dreams.
4. Tax Planning
Many people don’t know this but there are many legal ways to reduce your tax liabilities. In fact, there are over 50 exemptions that allow you to reduce your taxable income; however, it requires you to make the right investments and purchases. Two of the most popular sections about tax deduction are section 80c and section 80 both of which considerably reduces the amount of tax that you have to pay.
5. A Retirement Plan
No one wants to have financial problems after retirement. Everyone wants it to be a blissful time, free of all worries. If you want your retirement to be smooth, you need to plan ahead of time. There are two things you need to do for your retirement: build a retirement fund and generate income during retirement.
The first one is pretty simple, you need to set aside some amount of money every month for your retirement fund. And as for the second one, there are many ways to generate an income during retirement, including Laddered Bonds, Laddered Certificates of Deposit, or immediate annuity.
Conclusion:
So there you have it, the ones mentioned above are the five key aspects of personal financial planning and management. They will not only help you maintain a good lifestyle but also set you up to have a great retirement. If you start focusing on these five aspects early on in your life, you wouldn’t have to worry about your finances for a minute. Have a great day ahead!
