The Importance of Personal Finance
Personal finance is a critical component to achieving any monetary goal. The primary reason being that your monetary goal, such as accumulating a certain milestone of net-worth, is the byproduct of a two-part equation.
{Income – Expenses = Savings}
{Savings^Time = Net worth}
It’s about Your Expenses
We all appear to be obsessed with building our income for a higher net-worth, but more often than not, place less emphasis on the expense aspect of it. You can have a house-hold income of $50,000, or that of $150,000; but what you actually get to save depends entirely upon your personal finance spending habits. The average household’s 3 largest expense categories, accounting for 40-50% of total expenses, are housing, transportation and food, respectively. Choosing to live in a 5 Bedroom, 4 Bathroom house (that you may not utilize fully) versus a 2 Bedroom 2 Bathroom house (that may fit your needs) would make a significant difference in your finances, before even accounting for the perpetual and proportional increased costs associated with the ongoing maintenance costs and upkeep of the larger home. The same goes for transportation, when deciding between purchasing a brand new german luxury vehicle versus a lightly used japanese vehicle. Sometimes, one may be able to justify this seemingly financially irresponsible behavior if it’s something they value or are passionate about. I have to admit, I am a performance car enthusiast myself and would hate to downgrade to a more economical vehicle. However, it’s decisions like this that can ultimately make or break financial goals. The earlier on in your career you make these decisions, the stronger they will compound throughout your life.
It’s about your Lifestyle Choices
Personal finance goes beyond the scope of just minimizing your biggest expenses. It is a lifestyle choice that develops and compounds overtime and ultimately influences your saving and spending habits across all areas of your lifestyle. Choosing to regularly eat at restaurants versus cooking at home, or buying groceries at their regular price versus on sale may not immediately yield a large chunk of change, but believe me when I say this; IT ADDS UP.
It’s about YOU
Ultimately, your personal finance is a reflection of you. It is a reflection of your priorities, your planning, your goals. You can better understand yourself once you assess and analyze your finances. At that point, you can differentiate and rebalance your wants, needs and long-term goals accordingly.