What Are the Five Foundations of Personal Finance?

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. 
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