These Are the 4 Crucial Areas of Personal Finance You MUST Pay Attention to!
You might find this hard to believe if you’re a regular reader of our blog articles here at Grad Excel, but as it turns out, a lot of people don’t actually know what personal finance is, or even have a basic understanding of its concepts!
However, when it comes to actually being able to break down these concepts of personal finance and why they’re so important, even less people would be able to give you a proper explanation.
Did you know that there is 4 main areas of personal finance that you need to keep in check?
These areas are:
- Your income
- Your spending
- Your savings
- Your investments
Let’s go into more detail in this article and discuss what each one of these points means, and what you can do to maximize your own personal finances.
Your Income
As popular show host Dave Ramsay always says, your income is your primary wealth building tool.
It’s more important than your investments, and even your spending.
Because without a strong enough income, even the biggest measures to save money and cut down on spending can prove futile if you’re scrambling to be able to afford all your bills and weekly payments.
Likewise, if you’ve got a large enough income, you can afford to splurge some money on living a good lifestyle, and still have enough left over every week or month to be able to grow your wealth and grow financially.
Your income refers to the amount of cashflow that you’re receiving, and forms the basis or first step of any financial plan, ever.
Whether this comes from a salary, in the form of dividends, or as a pension payment, it doesn’t matter; your total monthly and annual income is going to be your biggest wealth building tool in your arsenal.
It is with your income that you can choose to spend, save, or invest as you desire.
So How Can You Maximize Your Income?
Well, there are a few different things that you could do to maximize your own income.
Here are just a few ideas:
- Work towards a promotion from your current role
- Look for a new, higher-paying job (consider switching industries or job hopping)
- Invest in assets that will generate you more income
- Start a side hustle or business to supplement your income
Your Spending
Next up, the second most important aspect of your personal finances is going to be your spendings.
This is, the amount of money you’re putting towards expenses every week or month, regardless of what you’re spending your money on.
Some of your expenses are going to be going towards necessities like food and water bills, while the rest might be going towards things you don’t actually need to be spending so much money on, such as new clothes.
Spendings are wildly important due to the fact that how you choose to spend your money will dictate the portion of your total income that you’re left with at the end of each week.
If you spend more money than you make, you’re going to running at a deficit, losing money each week or month.
However, if you can control your spending and spend less than you’re earning, you’ll be left with a positive figure, and have money left over for savings or investments (which are really the two aspects that drive your ability to generate wealth).
It’s important to be able to develop good spending habits that are within your means so that you don’t run into financial problems later on.
Learn more:
How to Control Your Spending
The best thing that you can do to improve your spending habits is to cut down on the amount of money you’re spending on your ‘wants’.
That is, things like going out to the movies every week, buying new clothes you don’t really need, or spending money on things that you don’t actually NEED to be spending money on.
Now, I get it.
The cost of living has gone through the roof in recent years.
Many people are struggling to find money left over in their wallets, even after fully cutting down on their luxury spending.
If this is the case for you, perhaps you could look to switch to cheaper alternatives like smaller gyms, different brands of grocery items, taking public transport, etc.
Your Savings
This is a pretty simple, yet crucial aspect of your personal finances that you’re going to need to be keeping on top of if you’re got any aspirations to grow your wealth over time.
If you’re not adding to your savings at all, you’re not going to be increasing your wealth.
It’s that simple.
Put simply, it’s the money left over from your income after all your expenses, that can be used for future spending, or investments.
It’s a good idea to keep a good balance between the amount of savings you have and the amount you’ve got in your investment portfolio, so that you can maximize returns whilst minimizing risk.
To maximize your savings, you could either increase your income, reduce your expenses, or do a combination of the two.
Your Investments
Your investments, and where you choose to make your money work for you are going to be a key factor in deciding how wealthy you become.
You could choose to invest into the stock market, or the real estate market, or even into your own business!
And if done right, your investments could literally set you up for life and completely remove the need for you to work ever again.
With investments, the goal is to generate more money than you initially put into the investment.
Maximizing Your Investments
To maximize your investments, you’ll likely need to do some research about the different places you can invest your money into, figure out what works for you, and start putting some money towards building a strong portfolio.
If you’d like to learn how to do some investing yourself, check out the other posts we have here at Grad Excel.
Personal finance is one of those things that really should be taught in school to everyone, but generally isn’t, and comes back to bite people later on in their lives when they find themselves in financial strain due to having made dumb decisions in the past.
However, if you understand even the basics behind these 4 primary components of personal finance, you’ll be sure to go a long way and get a a huge leg up on everybody else in terms of personal financial acumen.
