Personal finance refers to the management of an individual's or family's financial resources, including managing Personal Finance could be short term as well as long term. It includes calculating one's net worth, Income, Expenses, Savings, Debt, Investments and managing financial goals such as buying a home, funding education, or retiring comfortably.
Effective personal finance involves:
1. Budgeting: Creating a plan for managing income and expenses. Budgeting is keeping track of your income and expenses, so you know where your money is going every month
2. Saving: Building an emergency fund and saving for long-term goals.
3. Investing: Growing wealth through informed investment decisions.
4. Debt management: Paying off debt timely and managing credit responsibly.
5. Financial planning: Creating a comprehensive plan for achieving financial goals.
Certain fundamental principles of personal finance are essential to grasp. For instance, it's advisable to refrain from purchasing expensive vehicles and curb excessive spending on luxuries. Additionally, it's crucial to recognize that one's primary residence is not typically considered an asset. Entrepreneurship is a viable pathway to achieving financial success, including becoming a dollar millionaire.
By managing personal finances effectively, individuals can:
1. Achieve financial stability and security
2. Build wealth over time
3. Reduce financial stress and anxiety
4. Make informed financial decisions
5. Enjoy a better quality of life
I suggest everyone must have their own personal finance excel sheet ready on their computers and it should be updated every month i follow the same for myself in Australia. Creating a personal finance Excel sheet is an excellent way to track and manage your finances. Here are some additional items you can consider tracking:
Make a list of your Monthly Income on Excel Sheet how much money is coming in it may include as below.
1. Salary/Wages: Regular income from employment
2. Investment Income: Dividends, interest, Inheritance and capital gains
3. Freelance/Consulting: Income from freelance or consulting work
4. Rental Income: Income from rental properties
5. Other Income or Cashflows: Any other regular income sources or cashflows
Make a list of your Monthly Expenses on Excel Sheet how much money is going out and try to reduce it.
Keep actual expenses receipts or track expenses from bank statement compute an average and enter details into excel sheet, Expenses may include as below. you will get to know total monthly expenses by summing up all below expenses. it can be multiplied by 12 to get annual Expenses.
1. Housing: Rent/Mortgage, utilities, maintenance
2. Transportation: Car loan/lease, gas, insurance, maintenance
3. Food: Groceries, dining out
4. Insurance: Health, life, disability, other
5. Debt Repayment: Credit cards, loans, mortgages
6. Entertainment: Hobbies, movies, concerts, travel
7. Clothing: Clothing, accessories, dry cleaning
8. Healthcare: Medical expenses, prescriptions, wellness
9. Taxes: Federal, state, local taxes
10. Miscellaneous: Gifts, subscriptions, unexpected expenses
Make a list of your Monthly Savings on Excel Sheet
Normally Monthly saving is calculated by subtracting monthly income and monthly expenses on excel sheet. it can be multiplied by 12 to get annual Savings.
Calculate your Total Net Worth on Excel Sheet
By simply adding all bank accounts balance worth of assets and subtracting liabilities NetWorth can be calculated
1. Assets Cash, investments, retirement accounts, property
2. Liabilities: Debts, loans, credit card balances
Make a list of all Investments and try increasing income on Excel Sheet
1. Stocks: Individual stocks, mutual funds, ETFs
2. Bonds: Government and corporate bonds
3. Real Estate: Rental properties, real estate investment trusts (REITs)
4. Other Investments: Cryptocurrencies, commodities, etc.
Make a list of all Charity/ 2.5% Zakat you do on Excel Sheet
1. Donations: Cash donations to charitable organizations
2. Volunteer Time: Time spent volunteering for charitable causes
3. Gold and jewelries Calculate total gold you have on excel sheet it helps in calculating actual gain in value of gold and in calculating contribution of charity and zakat.
Additional Items to Track on Excel Sheet
1. Credit Score: Monitor your credit score , current assets distribution percentage and other reports
2. Debt-to-Income Ratio: Track your debt payments as a percentage of your income
3. Savings Rate: Monitor your savings rate as a percentage of your income
4. Investment Returns: Track the performance of your investments
5. Financial Goals: Set and track progress towards specific financial goals, like saving for a down payment on a house
6. Expense Ratios: Track your expenses as a percentage of your income, to identify areas for improvement
7. Cash Flow: Monitor your inflows and outflows of cash to ensure you're managing your finances effectively
8. Family ID Documents & Passports expiry date can be tracked for the purpose of timely renewals
Build a skill that generate freelance income, invest in assets that grow over time and launch a side hustle that aligns with your passion. I am sharing ideas for side hustle and specifically for passive income streams it will certainly help you to become a multi-millionaire one day.
The 50/30/20 Rule
Allocate your income into three categories using the 50/30/20 rule:
1. 50% for necessities: Rent, utilities, groceries, transportation, and minimum debt payments.
2. 30% for discretionary spending: Entertainment, hobbies, travel, and lifestyle upgrades.
3. 20% for savings and debt repayment: Emergency fund, retirement savings, and debt repayment.
Sharing a screenshot from my Personal finance sheet for reference of readers
Regards
Waqar
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