Personal Finance – A Path To Financial Success

Written by: April Lunar

Personal finance is a matter of taking a number of steps to straighten out your finance. This can be done in numerous ways. For some, it is simply crossing the items off their list. For others, it is a continuous process of gaining knowledge and being disciplined.

Often, the fundamentals of financial success are the same that applies to winning games or passing exams. You have the proper grip on the game and know how to play well. Y learn the tricks to get an edge over other players. Similarly, you will fail in the exam if you don’t learn the subject well before due date. Remember that, no one starts out rich unless they have inherited a significant amount or found treasure buried in their backyard. 

Financial success involves taking a good stock of what you have and what you need to retire well. It is important that you occasionally take a snapshot of your financial status. This is the first step in putting yourself on the right track. So, add up your earnings from the year you started working to the current date. Your social security statement will contain a statement of this amount for each year. Otherwise, refer to your tax returns to obtain this number. Estimate income from other sources as well, such as gifts, investments, sales and so on. This exercise to figure out your total earnings can be an eye-opener too. It will let you know how much money you made during your lifetime. It will also solve the mystery of whether or not you are doing good financially.

Now, find out what your net worth is. Net worth is the sum of your assets and liabilities. If you have liquidated most of the assets and a huge amount of money is stashed in your savings account, you have something to show for the earnings. However, if liabilities exist, you will have to deduct that number from your net worth. For instance, the money in your retirement account is an asset, so are your personal belongings like car, jewelry and cash in hand. Meanwhile, credit card loans, student loans and mortgage are your liabilities. 

Your home can be either an asset or a liability. For example, if you are a homeowner of a 5 year old $500,000 house with a $200,000 mortgage, your net worth is $300,000. Similarly, student loans and the interest you are paying are your liabilities that will exist for the entire term of the loan. 

You now have a ballpark estimate of your total earnings as well as your net worth. The next step is to learn how well or bad you are doing. In this case, if your net worth is roughly equal to your total earnings, you are doing really well. Even if it is half of the earning, you still have room to improve. On the other hand, if your net worth is zero or on the negative side, you might be disappointed for the fact that after all hard work you put to earn that money, you have nothing to show for it. 

The big question is, where do you go from here? Are you going to contribute to your net worth by earning and saving money from now on? Do you want to invest so that you can retire peacefully? Or will you buy more goods and services and just forget about the whole saving part? The choice is yours. However, for a healthy financial result, you will have to save and cut down on spending. 

Talking about spending, many people assume that spending can only be good for them and equally good for the economy as a whole. This is partially true. Minding your spending is absolutely essential to future financial success. When you are in debt and your finance is weighing heavily on you, you need to stop thinking about the economy and focus on yourself. The best way to handle your spending habit is to track the expenses regularly. It doesn’t matter how you track them. You can use a notebook and pen, software or simply compile the store receipts at the end of the day. And if you are using credit cards for all the purchases, it is easier to keep an eye on your spending. 

Then categorize every purchase that you made. Food expenses, for example, can be divided into home made meals and takeouts. If you notice that the outside meal cost is significantly higher than your monthly grocery purchase, it means your spending is out of control. Nevertheless, you will have to face the ugly truth or be prepared for the little things that add up in the list. You will be shocked when you find out that you are spending $300 a month for coffee when you can have it made at home for under 10 bucks. And that DVD rental that cost $100 could have been streamed for free if you knew how. 

The point is to identify where your hard earned money is being misspent and how you can redirect those money for future use. For this to happen, you will have to set priorities and have spending goals. These goals will give you directions and let you help with a financial plan. They also provide you with non-financial benefits such as peace of mind and sense of security. This way you won’t have the urge to make unnecessary purchases. The plan you devise for your future should include items that will make your life easy to handle. 

Eliminating debt should be one of the goals mentioned above. You may want to get rid of those debt that is costing you a lot of money and at the same time, freedom and peace of mind. Credit card debt is one such debt. So, give highest priority to eliminating credit card debt and lower priorities to low-interest debt such as student loans and mortgage. Again, make sure that these goals have a date for completion as well.


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