What is personal financial management? How does it benefit us, and how can we use it to improve our financial situation? Join us in this article as we aim to explain the principles of personal financial management and provide you with everything you need to know about the secrets of this important category.
One of the most important skills you must possess in your personal life is personal money management, which can significantly improve your quality of life, especially the financial aspect.
In short, personal financial management focuses on the following programs:
-
The ability to control income and expenses.
-
Planning for the future.
-
Making smart financial decisions.
These activities do not only help increase wealth and economic security; they also work to reduce the daily stresses caused by financial problems. Today, many people, despite earning a good income, face constant financial anxiety due to a lack of financial planning and a specific strategy for money management. These anxieties can lead to impulsive decisions, unnecessary expenses, and even additional debt.
The importance of personal financial management lies in the fact that by following simple and logical principles, you can make your financial life path more predictable and controlled while taking advantage of income growth and investment opportunities. Common financial problems often include unnecessary spending, poor spending control, the absence of an emergency fund, and poor debt management. Without careful monitoring of their income and expenses, many spend a large portion of their income on non-essential items, eventually leading to a lack of liquidity for more important purposes.
Additionally, a lack of financial planning leaves a person unable to achieve their short- and long-term goals, results in missed opportunities to increase income, and even causes feelings of insecurity and anxiety in critical situations. By recognizing these challenges and using the tools and principles of personal financial management, every individual can guide their economic life in a purposeful, balanced, and low-risk manner, moving toward financial stability and growth while reducing stress.
What is Personal Financial Management?
Personal financial management is the process of planning, managing, and directing your income and expenses to achieve your short- and long-term financial goals. This skill helps you manage your money, control your debt, and save and invest for the future.
In daily personal life, weak financial management can lead to monthly salaries being quickly spent on unnecessary expenses, the accumulation of debt, or not having enough money for important and emergency purchases. For example, a person who spends without a plan may not be able to cover car repair or medication costs at the end of the month, whereas these needs can be anticipated and budgeted for through sound financial management.
Basic Principles of Personal Financial Management
If you feel weary of running out of money at the end of the month and want to change your financial situation, you must learn the basic principles of managing your personal finances. These principles will help you adjust your spending based on your income and avoid non-essential expenses. While applying these things may seem difficult at first, the results will undoubtedly surprise you in the long run.
1. Income Budgeting and Expense Monitoring
Whatever type of financial management we talk about, the first step is budgeting. Whether in personal, family, or large-scale financial discussions, budgeting is one of the most important tasks to maintain. This step involves keeping a detailed record of all your monthly income and expenses and analyzing how you spend your money. Once you know your income and how it is spent, you will be able to make more conscious decisions about spending or saving money.
2. Regular and Consistent Saving
While many believe in this era that saving may decrease the value of our capital, it is practical to keep immediately spendable savings for emergencies—or as Iranians say, for “rainy days.” Saving is an essential part of any successful financial plan. In your budget, after you earn money, save a portion of your income in sub-accounts (that you do not touch). This could be 10% or 20% of your income. The important thing is for it to be monthly and become a routine.
3. Smart Investment
The third principle is investment. In addition to a savings plan, you must also set a plan for smart investment. If you are not a risk-taker or haven’t invested before, we recommend low-risk options. Mutual funds are a safe and low-risk option to start. As your financial knowledge increases, you should build a diversified portfolio that offers high returns and low risks. Smart investment allows you to grow your assets over time and benefit from the power of compound interest.
4. Debt Management
Debt management means reducing high-interest debt and planning for its timely repayment. High-interest debt can quickly become a financial burden and reduce your ability to save and invest. Proper management includes identifying your debts, prioritizing repayment based on interest rates, and avoiding unnecessary new debt. For instance, you should pay all your debts—especially utility bills—at the beginning of the month so that anxiety does not haunt you until the month’s end.
5. Setting Financial Goals
A life without a goal is meaningless. By setting short-, medium-, and long-term financial goals, you can give meaning to your life and create a clear vision of your financial situation that keeps you on the right path. These goals provide direction and motivation for saving and investing. We also recommend developing healthy financial habits—abandoning unhealthy behaviors and turning behaviors that contribute to your financial growth into habits.
See also
Personal Financial Management Tools and Techniques
Managing personal finances in today’s world is nearly impossible without the right tools and techniques.
A. Using Budgeting and Accounting Apps
Budgeting apps are a fundamental pillar of personal financial management in the digital age. These tools allow for the accurate and organized recording of income and expenses and provide analytical reports. Features include categorizing expenses, setting limits for categories, and reminders for payments. Many of these apps also allow you to connect to bank accounts for automatic transaction logging.
B. Budgeting Techniques: The 50/30/20 Rule
One of the most effective methods is the 50/30/20 rule. It provides a simple framework for dividing monthly income:
-
-
50% for Needs: Essential expenses like rent, bills, and food.
-
30% for Wants: Personal expenses and entertainment.
-
20% for Savings: Savings or debt repayment and investment.
-
C. Monthly Reports and Financial Performance Review
Regularly reviewing financial performance involves gathering information on income, expenses, liabilities, and investments to measure progress toward set goals. Monthly reports help an individual identify strengths and weaknesses and take corrective actions.
D. Using Artificial Intelligence
AI is growing rapidly. This tool significantly helps in making financial decisions and introduces you to the tools, techniques, and hacks necessary for financial growth. Utilize smart chatbots to manage your personal money.
Common Mistakes in Personal Financial Management
There are some mistakes that even wealthy individuals may make in managing their personal finances:
-
Spending Without a Plan: This is one of the main causes of financial problems. It leads to unnecessary purchases and emotional decisions.
-
No Emergency Fund: Without a portion of income set aside for unexpected events, a car breakdown or medical expense can cause severe financial stress and lead to a debt spiral.
-
Investing Without Knowledge: Investing all capital in risky projects without proper analysis can lead to significant losses.
-
Delaying Debt and Savings: Assuming there is always time later increases the debt burden and reduces the power of compound growth over time.
Practical Solutions to Improve Your Personal Financial Situation
-
Create Positive Financial Habits: Accurately recording expenses and reviewing cash flow monthly increases awareness.
-
Commit to the Budget: A realistic budget provides a benchmark to evaluate monthly performance.
-
Use Reputable Financial Advice: Professional guidance and educational resources like books and online courses equip you with skills for wise decisions.
-
Periodically Monitor Financial Performance: Re-evaluating your financial situation every few months ensures you stay on track despite changes in income or goals.
Final Conclusion on Personal Financial Management Principles
Personal financial management is a skill capable of changing anyone’s financial life. By following simple principles such as budgeting, regular saving, smart investing, debt management, and goal setting, an individual can enjoy financial security and peace of mind. Practical tools like budgeting apps and the 50/30/20 rule simplify the process and reduce common errors.
The more aware and disciplined a person is, the greater their chances of achieving their short- and long-term goals. Ultimately, personal financial management does not just grow your assets; it allows you to lead your daily life with greater comfort, confidence, and readiness for the future.
