Five Foundations of Personal Finance – The Essentials

If you’re interested in learning about the five foundations of personal finance and how to manage your money correctly, you’ve come to the right place.

In this article, we’ll walk you through the five foundations of personal finance and a five-step plan to assist you in navigating your finance path, the fundamentals of managing money, and a bonus of a few solutions to keep things running smoothly and efficiently.

What is personal finance? 

Personal finance, in summary, is how you manage all of the income you make or get. 

Personal finance usually entails devising a strategy for allocating funds. You could divide your earnings into such categories: 

  • Income: All of the money you make or receive. Compensation and rewards, retirement, profits, and money received as gifts are all examples of income. 
  • Spending: Where did your money go? This category includes both needs like rent or mortgage payments and food, as well as non-essentials such as entertainment, activities, and whatever else you buy just because you want to. 
  • Saving: Do you have a large sum of money in your shoebox? You can also save money by putting your funds in a primary savings bank or making investment money market products. 
  • Investing: Equities, shares, and unit trust are joint holdings, like investments in real estate holdings or private enterprises.
  • Protection: Emergencies and unplanned situations should be planned for. This entails obtaining different types of insurance, such as health or insurance products. It could also entail planning for the future.

Five Foundations of Personal Finance 

A financial knowledge strategy is as individual as the person who creates it. There is no one-size-fits-all approach but a few recommendations to follow when you construct your own. Here are the five basic foundations of personal finance: 

Determine goals and priorities

To create a budget and begin your plan, first, you need to understand what you truly want from the near and distant future. 

Ask yourself the “big” questions like

  • What other finances do I desire? 
  • What kinds of things do I want to own? 
  • What kinds of experiences do I want to have? 
  • What is the state of my work, parents, and private life? 
  • What would I like to modify about my present situation?

By answering these questions, you’ll be able to determine your spending limit, and even adopt a long-term perspective rather than focusing just on covering this year’s budget expenses. 

Don’t be concerned if these questions are challenging or if you don’t know how to respond with certainty. The goal isn’t to schedule your entire life; instead, it’s to get you beginning to think about it so you can eventually build your roadmap. 

Remember that your financial planning blueprint should be as adaptable as your life. Maintain fluency and try to prevent “analysis paralysis,” which prevents you from ever initiating!

Assess current financial situation 

Before creating a personal finance strategy that understands your daily existence and needs and wants, you must first fully comprehend who you are. 

This begins with a simple examination of two factors: 

  • Income stream, also known as “money in vs. money out,” is the amount you earn and spend each month. 
  • Net worth is the amount of money and assets you currently own, less your incurred debts, such as outstanding credit card payments.

A simple — yet useful — practice to understand and control your financial situation is to keep track of your personal spending. For example, you can keep track of the receipts for your purchases to see how much you’ve spent each month. By collecting the receipts that you receive, storing them, and reviewing them on a regular basis, you’ll be aware of your spending habits, and can then adjust if needed. 

There are many ways to store receipts, however, we suggest digitizing your paper receipts with a receipt scanning app. And Shoeboxed can help you with just that! Shoeboxed is a receipt-tracking and expense-managing service for freelancers, sole proprietors, and small business owners. You can capture your receipts, and the app will automatically extract the key data, categorize and organize them, and even generate expense reports for you. You can clear your wallet, desk, and drawers from bunches of paper receipts while storing them safely for years! 

What’s more, Shoeboxed offers OCR (Optical Character Recognition) engine and human data verification features, ensuring that the digital versions of your receipts are scanned in precise format, well categorized, and contain human-verified information that is approved by both the Internal Revenue Service and the Canada Revenue Service. And last but not least, you can even track mileage for business and store business cards with the Shoeboxed app. Doesn’t it sound great to access all your important information with one touch? 

Pay-off debt 

If you already have borrowing (college tuition, credit card bills, etc.), make it a priority to pay it off as soon as possible. The faster you can pay off your debt, the less interest you’ll have to pay. That means you’ll be able to keep much more of your money over the long term.

It may be painful to look at the figures, but it is necessary for personal finance management. The earlier you can create and implement your strategy, the better off you’ll be compared to the financial circumstances you’ve been fantasizing about.

Set a budget

The most exciting thing that can be done in your financial health is creating and estimating costs. It ensures that you are functioning toward your objectives, and having a specific amount to comply with will help keeo you responsible every day, week, month, and year. 

Your spending plan should clearly present your income and unfunded liabilities. To achieve that, you can start by asking yourself such questions: 

  • Do your outgoings usually outweigh your inflows? If so, how much? 
  • Where might you start by cutting back on your spending? 
  • Is there a great bonus or another way to earn more money on either corner of the operating cash? 
  • What amount of money would you like to pay against your loans each month? 

Calculating a monthly spending limit will help you connect your income and expenditures– or widen the numbers so you can save even more money. 

You can create an Excel spreadsheet, note, or use a personal finance app/software to keep track of your assumed responsibility for each period.

Save money monthly 

Every brokerage will advise you to save for an urgent situation. This fund would cover nearly 4 to 6 months of your expenditures in a perfect scenario if you lost your job. 

If you have significant debt, saving money may seem impossible. That is understandable. 

However, you should indeed begin by having saved even just a tiny amount. Begin by putting $5 in your piggy financial institution or saving account on your banking app each week. Add “Savings” as a cost to your liquidity worksheet so that you can keep records of it. You can increase your savings amount to $10, then $20 each time, and so on.

If this sounds too difficult, you can start with considering what you thoroughly appreciate and what you can do without. Don’t abuse yourself – it’s essential to spend money on what makes you happy. 

Instead, you can determine which expenses you can conveniently reduce rather than become unhappy. For example: 

  • Cook more as food products are less expensive than eating out. 
  • Revoke or stop any club membership or subscriptions that you don’t need.
  • Take public transport or ride a bicycle rather than getting an Uber or driving your car. You’ll also benefit from some light exercises. 
  • Sell several items that you have bought but never used. We’ve all got a lot of those.

You might also be interested in: Amazing Ultimate Guide To Effective Family Finance Management.

The bottom line

Financial planning is not as relaxing as a walk in the park. However, the better you understand how everything works and incorporate that understanding from your objectives and condition, the more straightforward and more effortless it becomes. 

Starting from understanding and managing the five foundations of personal finance properly, you’ll be able to control and develop your financial plan and even take it to new heights. 
Don’t forget to sign up for the Shoeboxed blog for more engaging success stories, entrepreneurship, DIY accounting, together with the latest Shoeboxed product update.

Amazing Ultimate Guide To Effective Family Finance Management

Every family needs a good guide on how to manage finances. This helps the family not to spend more than they make and not to be in debt. Let’s have a look at the 5 management principles and 5 common mistakes in managing the family’s finances, as well as 8 secret tips to effectively improve your management.

5 Important Principles In Family Finance Management

1. Transparency

When living in the same house, using separate sources of income will get newlyweds into trouble. To avoid arising awkward situations later, the couple should disclose all sources of income, expenditure, and debt (if any) of themselves to each other.

This helps the couple to grasp the current family financial situation. After that, it is easy to distinguish common and separate financial resources and plan family financial management.

2. Create a detailed spending plan

To make a complete and detailed spending plan, couples should list and classify their expenses and the proportion of each expenditure on income.

Here is the principle of the 6 jars, considered the golden formula for effective spending management, introduced by author T. Harv Eker in the book Secrets of the Millionaire Mind. The 6 main jars represent the 6 main expenses of a family. Eker shows the proportion of expenses in income as the chart below.

Divide income into small amounts for better control of personal and family finances.

Divide income into small amounts for better control of personal and family finances.

Newlyweds can also adopt more optimal spending methods, such as buying in bulk (in bulk). To do this, you should refer to more companies following the Groupon model (Groupon = Group + Coupon). These companies encourage many people to form groups, buy the same items offered on the website to receive preferential prices, helping you save more money.

3. Monitor your budget periodically

After you have a detailed spending plan, you need to keep a close eye on your expenses. This helps your family not to be “excessive” when spending beyond the plan.

This monitoring is as important as planning. Because, if you make a plan without doing it right, the plan will be thrown away!

We recommend using a notebook or software to track your family’s income and expenditure.

Shoeboxed is an expense tracker app that stores all your bills on the cloud and allows you to make a report out of it easily. All you have to do is scan your bills, organize them the way you want, and you’re good to go. Shoeboxed will make your expenses tracking and management a breeze!

4. Financial dispute resolution

In addition to understanding each other’s spending habits, the couple should also discuss and agree more on resolving financial disagreements if any in the future. The principle of equality and sharing should be put first.

5. Saving and investing continuously

Saving

Every family will have a lot of emergency situations that they themselves do not anticipate. At that time, the savings will be the lifeline for the couple. In addition, these savings can serve many different purposes such as buying big assets, seizing new opportunities, ensuring children’s education…

The savings that each person should set aside each month is usually 20% of income, like the 6 jar model that we introduced to you above.

Invest

Saving is definitely necessary and then investing, why is it important?

Surely you are not familiar with the concept of money making money anymore, right? Investing is one of the fastest ways to make money. This is an additional source of passive income for the family, you can use the income from investments to cover your married life, save or reinvest.

Only relying on fixed income sources is too difficult for husband and wife to balance income and expenditure, especially in urgent situations.

5 Common Mistakes In Managing Family Finance

1. No clear plan

No financial management plan will easily lead to uncontrolled spending, no reserve fund for the future, especially for children. In addition, in emergencies, the family will become troubled, which can cause disagreement within the family.

2. Do not track and manage expenses

Many families are subjective with monitoring and managing expenses or completely rely on the balance of the wife. There are many ways to monitor, it is important that the couple know how to work on this task together. Since we are living in the era of technology, let’s get used to monitoring and managing with utilities or software (apps) on phones for the whole families.

3. Disagreement on habits and spending

“You spend your sugar, I spend my sugar” or “you have to give me all the money to keep, it’s forbidden to have a separate fund”. Mistake!

Being too financially independent will be difficult to use for common purposes, or when there is urgent joint work, both husband and wife are not available. The lack of a separate account interferes with the other party in social communication, now going out without money is very difficult to manage.

Understanding the spending habits and needs of the other person to make it easier to set up a general fund, a separate account, then making a plan to manage family finance are all equally important.

4. No division of financial responsibilities in the family

Most of the couples 8x and earlier, the husband working, the housewife is the model, the division of financial responsibilities in the family is very easy. The husband is responsible for the family’s income. The wife is in charge of spending so that the expenses are appropriate and there is a reserve fund.

Nowadays, most couples have their own source of income. The sharing of financial responsibilities between husband and wife, if not clear, will easily lead to an urgent need for money without any available money because both have used up their income.

5. No reserve fund

Saving is extremely important. Read also the 5th principle above to find out why. Don’t fall into an unwanted debt situation because of a lack of reserve funds.

8 Tips To Effectively Manage Family Finance

1. Have a family expenses plan

Let’s start with planning. The monthly expenses should be less than the couple’s income. Planning will help you determine if you can eliminate unnecessary and wasteful expenses for your family.

2. Please consider carefully before buying

Before you buy anything, check prices and quality in many places to make sure you’re getting the best deal. Do not forget to read the reviews of the users first, then choose a reputable brand and address.

3. Take time to discuss with family

Take time to talk to family members about budgets and household expenses. Check that your current budget fits what you need to spend. Discuss removing unnecessary items or add if necessary.

4. Have a financial goal

Next, you need to set a financial goal to decide and organize the plan. Based on that, you will determine what needs to be prioritized and closely monitor your financial funds to achieve your goals.

5. Don’t ignore the extra costs

You should not only focus on the fixed monthly expenses but ignore the costs incurred. Each month, you will have different needs. For example, during Tet, you need to increase spending on house cleaning, clothes, food, fun activities, lucky money, etc. And the budget for this must be properly allocated.

6. Spend with purpose

Before spending money on anything, ask yourself what is the purpose: “Why buy this product?”, “Why pay for this service?”. Analyze the reason for each expense to make sure you’re on track for your goals.

7. Saving with a purpose

Just like spending, you should find a reason to save. If you know why you have to save (buy a house, buy a car, etc.), you will easily resist the urge to spend money.

8. Monitor your credit report monthly

Every month, you should take the time to go through your credit report. Be wary of credit loans because if you don’t pay attention, you will borrow more than you can afford.