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Personal finance can be intimidating at first. But if you are willing enough to give it some time, you will see this subject is really easy to understand. I hope I won’t make it sound too simple, but personal finance, in essence, is utterly all about the right practice of managing your money. In this article, we will talk about the six ways that can help you understand personal finance better. Be sure to read on if you want to improve your knowledge about money management.
6 Ways To Understand Personal Finance
1. Work on your financial vocabulary.
One, if not the best, way to understand personal finance is to learn its jargon. Words are the building blocks of learning. The more financial terms you learn, the better you understand how money management works. Every word is like a piece of the puzzle that shows you the whole picture when put together. Below is a list of common terms you will encounter when studying personal finance: (simplified in my own words)
- Budget — Basically an allotted limit of how much money you can spend.
- Savings / Emergency fund — The portion of your income you keep for emergency and/or investment purposes.
- Insurance — A guarantee of protection, safety, or compensation against loss and mishap.
- Debt — Money you owe to a person or an organization.
- Credit — The ability to acquire goods or services before actually paying for them.
- Assets — Anything that generates – or can possibly generate – value now or in the future. (e.g. stocks, real estate, jewelry, etc.)
- Liabilities — It’s essentially the opposite of assets. It is anything that depreciates or reduces value. (e.g. household bills, car maintenance, penalty fees)
- Investing — The practice of acquiring assets. It’s making your money earn more money.
- Inflation — The general idea about the continuous increase in the prices of goods and services.
- Interests — The amount you earn for lending your money, or the fee you pay when borrowing.
- Assets And Liabilities Management: Our Simple Plan To Financial Freedom
- Insurance Vs Investment: How to know which one is right for me?
2. Sharpen your math skills
Almost equally important when understanding personal finance is your proficiency in math. Don’t worry, you generally do not need complex skills in math to be good at managing your finances. But being fundamentally sound is essential. You must be a master of basic mathematics such as addition, subtraction, multiplication, division, and percentages. Here are a few necessary financial equations you must know:
- Rule of 72 [Number of years = 72 / annual interest rate]
Used to estimate the number of years and the annual interest rate to double your invested or borrowed money.
This equation is especially helpful when dealing with credit card debts. It puts things in perspective when you realize credit card companies, more or less, charge you 36% annually for late payments. At this rate, your overall debts can double in two years!
- Savings [Savings = Income – expenses]
Determines how much money you saved. But in my experience, the reverse is more effective: Expenses = Income – savings
- Simple interest [Amount = Principal(1 + (Interest rate x time))]
Helps you see the principal amount with interest.
- Tax [Varies.]
Computing for taxes will always be part of personal finance. Be sure to familiarize yourself with how taxes are computed based on your occupation, marital status, and area.
- Retirement savings goal [Amount = Desired yearly retirement income x 30]
This helps you get a snapshot of how much you need to save up for your retirement. Please note retirement planning has more complex equations. The formula above is just a basic computation of the total amount you prefer to live off 30 years after retirement.
The good news is, we do not necessarily need to memorize these equations nowadays. There are many free online calculators and downloadable spreadsheets available on the web that we can use. The objective, however, is to grasp the principles behind these formulas.
3. Practice personal finance in your daily life
There is no shortcut to understanding personal finance. If you really want to get better at money management, you have to practice it. Do not delegate it. You must do it yourself regularly. I’m not saying you should do it all at once. Just start with the basics and little by little get into the areas of finance that apply to your life. Below is a list of suggestions you can start doing today:
- Track your income and expenses.
- Set a financial goal.
- Create a food budget.
- Start saving 20% of your income.
- Put your money in a high-interest savings account or time deposit.
4. Immerse yourself in the topic
I began learning about personal finance in 2016. Six years later, I am still learning new things. My wife and I got financially broke 6-months after we got married. It is a phase in our lives we hope we will never experience again. I get it, financial management can be boring. But what happened to us perhaps is the reason why I continuously immerse myself in this topic.
What about you? What is your main motivation to understand personal finance? I don’t think anyone will just magically become passionate about this subject. Anyhow, if you plan to immerse yourself in financial management, here are the resources I recommend:
- The Total Money Makeover — Dave Ramsey
- The Millionaire Next Door — Thomas J. Stanley
- Your Money Or Your Life — Vicki Robin
- Introduction to Finance: The Basics
- Financial Planning for Young Adults
- Personal and Family Financial Planning
- Ramsey Everyday Millionaires
- We Study Billionaires – The Investor’s Podcast
- The Minimalists
- 9 Good Financial Management Ebook Worthy Of Your Time and Money
- Learn Finance Basics Online: 8 Reasons Dads Need to be Good with Money
5. Talk about money with people you trust
I am aware money is an awkward topic for some people. But for me and my wife, we talk about it all the time. Talking about money with people you trust helps you learn about it from another person’s perspective. More than that, it also provides you with an accountability partner — who can nudge you in the right direction when you are being led to wrong financial behavior and mindset. Below is a list of topics you can talk about with your companion:
- What area of personal finance do you find most difficult to do?
- Are there any bad money habits you need to break?
- If money is not an issue, what are you doing right now?
- Case studies: what would you do if you were in (someone’s) financial situation?
- What do you consider a financial success?
- How much is enough?
6. Teach others about personal finance
This final point will validate your understanding of personal finance. You know you have already understood financial management when you are finally able to teach this subject to others. I was blessed to have been invited to teach about personal finance and investing a few times already – even though I admit I am not quite qualified to talk about it yet. But still, I took it willingly because I know I am among those who are going to benefit from it in the end. Here are a few ideas where you can teach personal finance:
- Write a blog.
- Create a YouTube channel.
- Organize a small group.
- Do a one-on-one consultation for free.
- Record a podcast series.
- Make an online course.
There are a variety of ways to understand personal finance. But perhaps the most important part of learning financial management is your ability to stick to it for the long haul. Studying about money can eventually get boring and repetitive. The challenge is how to be able to keep yourself engaged in the subject.
- Why Is Personal Finance Personal?
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- What Is The Purpose Of Personal Finance? Not what you think
- How Can You Apply Personal Finance In Your Daily Life?