Personal finance refers to the financial decisions which an individual or a family unit is required to make in order to obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

In this article, we shall examine the basic rules of Personal Finance that will guide in making financial decisions.

Live Below Your Income

This is the most important rule of all. Any person desirous of achieving financial success must develop a culture of spending less than he earns. This can be achieved by working on either sides of income and expenditure. Either we work to increase our income or we work to reduce our expenses or both. As we work hard on either spending less or earning more, our disposable income will increase. In turn, the later will accelerate our ability to achieve our financial dreams.

Enhance Your Income

As noted above, it is important that we work hard at enhancing our income as a strategy for increasing our disposable income. As people who are working hard at achieving a financially stable life, we must have a clear strategy of improving our income in the short and the long term.

Above can be achieved through getting a better education, establishing streams of passive income, starting a side business, working hard at our current job and other related efforts. As we move from one stage in life to another, our financial obligations will increase. Therefore, it is important that we towards increasing our income in the same progression.

Live a Frugal Lifestyle

Like many other rules in Personal Finance, this rule derives from the rule of living below your income. Not that we really have much choice about living below our income but in credit driven economies, it is very easy for our personal finance to get out of control as a result of borrowings.

Living a frugal life does not mean living a miserable life. Instead, it means living within your means thereby ensuring that you are in control of your finances and not the creditors. It is a deliberate and conscious effort to live within your income with a view to creating an enabling environment for wealth accumulation. A frugal lifestyle enables us to go beyond immediate gratification to having the big picture in mind.

This habit urges us to save as much as possible without making ourselves miserable. It enables us to avoid regrettable expenditures by applying the ten seconds rule. This rule says that every time we want to make a purchase, we should spend ten seconds to ask ourselves if we really need what we are about to purchase. Very often, this simple rule will point us in the direction of spending less money.

Learning to Manage Money

Having gone through the above steps, it is very likely that you will begin to have an excess of income over expenditure. The savings so accumulated is your ticket to financial freedom. At this point, you must learn to channel the excess funds into profitable investments. Money begins to work for you and not against you. As this stage, you must also begin to know the difference between asset and liability. Invest more in assets and pay off your liabilities.

Be in Control

Personal Finance is not about being rich, it is about being free. Freedom from debt. Freedom from stress and worries. It's about being in control of your finances. And so, the final rule is be in control.

In conclusion, most people spend most of their lives earning money but rarely spend enough time planning the efficient use of same. This leads to a lot of financial regrets. The result is that at age 65, most people are flat broke.

It is therefore very important that we take the issue of Personal Finance very seriously. Our financial well-being is worth some time and effort. If we observe the above rules, it would lead to fuller and happier life.

The Rules Of Personal Finance

Personal finance refers to the financial decisions which an individual or a family unit is required to make in order to obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

In this article, we shall examine the basic rules of Personal Finance that will guide in making financial decisions.

Live Below Your Income

This is the most important rule of all. Any person desirous of achieving financial success must develop a culture of spending less than he earns. This can be achieved by working on either sides of income and expenditure. Either we work to increase our income or we work to reduce our expenses or both. As we work hard on either spending less or earning more, our disposable income will increase. In turn, the later will accelerate our ability to achieve our financial dreams.

Enhance Your Income

As noted above, it is important that we work hard at enhancing our income as a strategy for increasing our disposable income. As people who are working hard at achieving a financially stable life, we must have a clear strategy of improving our income in the short and the long term.

Above can be achieved through getting a better education, establishing streams of passive income, starting a side business, working hard at our current job and other related efforts. As we move from one stage in life to another, our financial obligations will increase. Therefore, it is important that we towards increasing our income in the same progression.

Live a Frugal Lifestyle

Like many other rules in Personal Finance, this rule derives from the rule of living below your income. Not that we really have much choice about living below our income but in credit driven economies, it is very easy for our personal finance to get out of control as a result of borrowings.

Living a frugal life does not mean living a miserable life. Instead, it means living within your means thereby ensuring that you are in control of your finances and not the creditors. It is a deliberate and conscious effort to live within your income with a view to creating an enabling environment for wealth accumulation. A frugal lifestyle enables us to go beyond immediate gratification to having the big picture in mind.

This habit urges us to save as much as possible without making ourselves miserable. It enables us to avoid regrettable expenditures by applying the ten seconds rule. This rule says that every time we want to make a purchase, we should spend ten seconds to ask ourselves if we really need what we are about to purchase. Very often, this simple rule will point us in the direction of spending less money.

Learning to Manage Money

Having gone through the above steps, it is very likely that you will begin to have an excess of income over expenditure. The savings so accumulated is your ticket to financial freedom. At this point, you must learn to channel the excess funds into profitable investments. Money begins to work for you and not against you. As this stage, you must also begin to know the difference between asset and liability. Invest more in assets and pay off your liabilities.

Be in Control

Personal Finance is not about being rich, it is about being free. Freedom from debt. Freedom from stress and worries. It's about being in control of your finances. And so, the final rule is be in control.

In conclusion, most people spend most of their lives earning money but rarely spend enough time planning the efficient use of same. This leads to a lot of financial regrets. The result is that at age 65, most people are flat broke.

It is therefore very important that we take the issue of Personal Finance very seriously. Our financial well-being is worth some time and effort. If we observe the above rules, it would lead to fuller and happier life.

A Good Time To Finance Your Purchases

An elderly client of mine recently met me and casually spoke about wanting to buy a car, so I asked him what he planned to buy and how. He said he was looking at something in the $40,000 range and wanted to pay for it from his savings because he just did not believe in debt. And while I understood where he was coming from and the generation he represented, I just knew that I had to talk him out of the idea of plunking down $40,000 cash when debt was so cheap and abundant.

So, I pulled out my iPad and ran a few numbers for him even though I knew the math and the answer in my head. I knew that the smart thing to do in these low interest rate times was to finance... not buy all at once. It's an idea in this debt averse times that needs to be addressed.

I ran a few numbers and showed him how most of his liquid assets were tied up in retirement accounts and nicely invested, and from which pulling out $40K would incur a harsh income tax bite. So it was best to let go of the idea of taking it out of his IRA and look for other sources of cash. He said he could take the $40K out of the roughly $44K he had sitting around in the bank, but that brought on some other issues.

Fundamentally, I wanted him to have enough cash on hand to tide him over a rainy day... and while $44K was way more than he needed to keep liquid, leaving $4K that would remain after he spent $40K on a car would be way too little given his health, family obligations, etc. I showed him how he could get low-cost financing with rates as low as 2.5% at certain institutions which would result in very manageable monthly interest payments. I also told him to not just go straight to his major commercial bank but to use auto loan calculators freely available at sites such as bankrate.com to do a little research before buying.

I also cautioned him against going in for too short a financing period because at such low interest rates, he'd be better off picking at least a 48-month payment plan. I told him he could make a down-payment of $10,000 because I knew he was concerned about taking on too much debt, and could finance the rest. He could then invest some of his capital to earn more than the 2.5% he was paying on the car. Rates are low, but it's not that hard to beat a 2.5% rate and you don't have to take a lot of risk to do so. In cases like this it is usually better to use other people's money if you use common sense.

I also suggested consider buying a used car with low miles directly from a dealer or other legitimate source so he'd have the peace of mind of buying a certified pre-owned car that had a clean title.

A few other tips I gave him... which apply to just about any big-ticket item you want to buy...

Get on the Internet and look at prices on sites like Kelly Blue Book and at other sellers of the product you want to buy.

Use handy on-line calculators to figure out things like monthly payments and fees.

Do not reveal your monthly payment capacity to the seller because they will find ways to hook you up with an expensive purchase that still meets your monthly payment capacity... instead, focus on price first even though the seller will keep pushing you for a monthly payment amount.

Do not get sold into buying more than your budget... see, you could well buy a $50,000 car for just a slightly higher monthly payment but remember, at the end of the day, you're putting your hard earned cash into something that depreciates in value the instant you buy it... it just does not make sense to throw money into depreciating assets especially when you have bigger things to worry about such as home loans, college expenses and so on.

Remember, you can either raise the bridge... or lower the water... Raising the bridge is about earning more to afford an expanded lifestyle, perhaps a dubious choice just to own a fancy car -or lower the water - voluntarily cutting back on your expenses to fit your income.

At the same time, if you have money, be smart about weighing your options and consider using loans in this low-interest rate environment so you can invest your cash somewhere else and have it deliver more than the interest rate you'd pay on your loans. So, be smart about how you manage your finances and keep all your options on the table.