What is Personal Finance? How to Manage Effectively & Easily

Managing personal finance must be done early. Personal finance or Personal finance is the process of planning and controlling one’s finances to achieve financial stability. Come on, learn to understand personal finance and invest for the future.

Personal finance is the process of planning and controlling one’s finances personally. It is fitting for all of us who live in this modern era to know how to manage personal finances properly. Therefore, we must be able to distinguish which is a need and which is just a desire.

Finances need to be planned because it will have an impact in old age later. If you are able to manage your personal finances properly and correctly, then in the future you will create stable and secure financial conditions. Therefore it is important to know about personal finance from an early age.

This time we will discuss about personal finance, starting from the meaning of personal finance, components of personal finance, to tips on managing personal finance properly. So, keep following this article, ok!

What is Personal Finance?

What is Personal Finance How to Manage Effectively & Easily

One of the skills that must be possessed by people today is the ability to manage their personal assets, especially in managing personal financial assets or known as personal finance. This is done so that in old age, financial conditions are guaranteed because they have managed their personal finances from an early age. 

Start managing personal finances as soon as possible, namely by knowing which ones are needs and which ones are just wants. Then, what is personal financePersonal finance is the process of planning and managing one’s personal finances and savings and investments. 

Doing personal finance is to realize one’s financial goals, both for the short term and for the long term. When you do personal finance management, it means you already know how to manage personal finances well. 

Which part of your money will be allocated for daily needs, education, savings, investment, and retirement. But keep in mind, implementing personal management for each person is definitely different, it all depends on income, economic conditions, expenses, savings and investments. Everyone’s amount in managing personal finances is definitely different, right!

Personal Finance Component

In personal finance or personal finance there are five components that must be known so that you can use and allocate them appropriately. The five components of personal finance are:

1. Income

Income such as salary is the starting point of your personal finances which is a cash inflow that will be received regularly. You will also allocate this income later to several divisions.

For example, such as to meet daily needs, savings, investments, to insurance. Apart from salary, other sources of income include bonuses, wages and dividends from investments.

2. Expenses

Expenses are also included in the personal finance manager. If income is the cash inflow that will be received on a regular basis, expenses are the opposite and income. Expenditures are cash outflows which will also be carried out regularly to meet primary needs to entertainment. 

Well, these outgoing expenses come from income received as cash inflows. Therefore, you must be able to manage it wisely. Because it is an expense, you need to pay attention so that the expenditure is not greater than the income received. 

If you can’t manage expenses properly until they swell, then later you will make loans or debts to cover the excess of these expenses. If a loan occurs, then you haven’t done proper personal financial management.

3. Savings

Savings is the rest of the income which is then stored for emergency funds, as well as for future expenses. Well, it’s best if every income you receive, allocate it at the beginning of several parts for savings.

Because saving itself is an important part of managing personal finances. So don’t forget to save, okay!

4. Investment

The next component of personal finance is investment. In managing personal finances, you can take advantage of investments whose results can later be used for future needs. Investment is an activity by buying assets such as stocks, bonds, and others, with the hope of getting a profit. 

You can start investing, but you need to learn about investing first. This is because every investment has the potential for loss that can be experienced by each investor. So, you have to be wise in investing in order to get the maximum return.

5. Insurance

Insurance here refers to a product that is taken for use in protecting or protecting someone from unexpected events, such as illness or accident. Insurance that you can use such as health insurance, life insurance, old age insurance, and so on.

Strategies for Developing Personal Finance

Previously, we discussed the five components of personal finance that you should know about. Next, you have to manage these personal financial components in order to create secure finances in the future.

The following are strategies for managing personal finance or personal finance, including:

1. Doing Budget Planning

The first step in a personal finance strategy is designing a budget. In designing a budget, you can follow several well-known budgeting methods, namely:

a. The 50/30/20 method

The 50/30/20 budget method is the method most preferred by millennials. This method was popularized by Senator Elizabeth Warren and her daughter Amelia Warren in a book entitled “All Your Worth: The Ultimate Lifetime Money Plan. 

The 50/30/20 method has a basic rule of managing personal finances by dividing income after tax, then it is allocated to meet daily needs by 50%, 30% for entertainment or desires, and 20% for savings.

b. Method 70-10-10-10

The next budgeting method is the 70-10-10-10 method. This method was popularized by Jim Rohn, a businessman, writer, and speaker from the United States. Jim Rohn shares his budgeting method by dividing the after-tax income into 4 groups.

70% to meet daily needs, 10% for future savings, 10% for investment, and another 10% to give to people in need.

So, which of these two budget planning methods do you want to choose? You can choose one of these methods according to your living conditions, yes.

2. Know Priorities

In managing personal finances you also have to know your priorities. Don’t let it, when you have made a budget plan, but you still can’t hold back your wants rather than your needs.

Make sure before fulfilling your desires, your needs must be met properly. There are times when you have to hold back all desires that only give temporary happiness. By knowing your priorities, your financial condition is much more stable than if you are more concerned with your desires.

3. Setting up an Emergency Fund

Setting up an emergency fund is important to do if at any time you are in a tense situation and you need funds quickly. For example, your family had an accident and needed medical treatment, you can use this emergency fund for this purpose. 

To set up this emergency fund, you can follow the previous budgeting method, which is 20% for savings. 

4. Limit Debt

The next personal finance strategy is to limit debt. Limiting debt here can be done by controlling expenses. If you can control expenses properly and are not greater than income, then you will not make loans and you have limited debt.

However, if it turns out that expenses are greater than income, then you will make loans or debts. 

5. Give Yourself a Rest

Yes, managing personal finances must be tiring and not easy. That way, you need to give yourself a break by respecting yourself. You can reward yourself for the tap work you have done so far.

By giving yourself a break, you will feel financial independence that was managed well before.

Understanding Personal Finance and Investments

We have discussed personal finance or personal finance in the form of a personal financial planning process to achieve good financial goals. If we recall, we must be wise in managing personal finances in order to create financial stability.

You can also feel the benefits of managing your personal finances in the future, where you will be free from debt because you have limited debt, and you have prepared funds for old age by saving.

Oiya, another way of managing personal finances that you can do and will provide long-term benefits is by investing. From investing, later you have the potential to get profits that you can save for retirement later. 

If you save money, you won’t grow if you don’t put it back in, but when you invest, you have the opportunity to get profits that can continue to grow. One of the investment methods that you can try with minimal capital is investing with an equity crowdfunding system. 

Equity crowdfunding is an investment method by jointly funding one of the potential MSME businesses in Indonesia. Later, you and several other investors will jointly fund one of the potential businesses. Furthermore, you also have the potential to benefit in the form of dividends from the business you have funded.

Read also: