What is Personal Finance?
Personal finance refers to the management of your individual or family’s financial resources, including income, expenses, savings, investments, and financial planning. It includes all financial decisions and activities that affect your economic well-being, from daily budgeting to long-term retirement planning
Managing personal finance can be intimidating, but it’s necessary to ensure a stress-free and secure future. By dividing the process into several categories, it can become more manageable.
Here are the only seven personal finance advice that you’ll ever need:
- Tracking
- Budgeting
- Emergency Fund
- Managing Debt
- Saving and Investing
- Insurance
- Financial Planning/Goals
1. Tracking
The first step towards managing personal finance is tracking your income and expenses. This category is all about creating a system that tracks your spending habits, income, and savings. There are two main things you need to keep in mind, your income and expenses. By understanding where your income and expenses are going you can make smart decisions on how to allocate these resources.
Income Management
Income management is the foundation of your financial planning – without a clear understanding of how much money is coming in, it’s impossible to make effective decisions about spending, saving, and investing. Here are some important aspects:
- Track your total monthly income from all sources
- Salary or wages
- Freelance work or side hustles
- Investment returns
Remember: You need to account for taxes, benefits and other deductions so you can accurately calculate your take home pay.
If you think your income is not enough for your monthly expenses, you should either add more income sources or cut down your monthly expenses, but you need to track your expenses first to know what to do next.
- Understand your take-home pay
- Account for taxes
- Consider deductions and benefits
- Calculate net income accurately
- Create a reliable income schedule
- Know your payment dates
- Plan bill payments accordingly
- Maintain a buffer for irregular income
Expenses
Tracking your expenses will reveal your spending habits, that information will help you optimize your budget.
Using your tracker, you might identify some unnecessary expenses that bleeds from your pocket without you realizing it. Here are some examples of expenses that you may need to take note of:
- Rent or Mortgage
- Food
- Clothes
- Water, Electricity, and other utilities
- Personal Hygiene
- House Cleaning Supplies
- Online Subscriptions such as Netflix or Spotify
- Hobbies and other forms of entertainment (we need this because we’re only human)
There are several tools available online and offline to help you with tracking, such as your computer’s spreadsheet, online services, mobile apps, or you can have your own physical journal. If you haven’t done it before, you should try several methods so you can tailor it to your own needs.
After setting up a system that works for you, you can now stay on top of your finances and adjust your spending habits as needed.
How I track my own income and expenses:
- Using mobile apps with export features so I can organize it onto an excel sheet on my computer and visualize and optimize it.
💡 Here are some helpful articles you should consider: Best Apps for Tracking your Income and Expenses 2025 Best Mobile Apps for Personal Finance Best Money Management Software
2. Budgeting
Budgeting is the process of creating a spending plan that helps you achieve your financial goals. The most popular budgeting method is the 50/30/20 rule, where you allocate 50% of your income to expenses, 30% to discretionary spending, and 20% to savings. Remember that this is only a guide, you can adjust the percentage based on your needs. Here are some examples:
50% of your income is for your monthly necessities
- Rent or Mortgage
- Water, Electricity or other utilities
- Food
- Clothing
- Personal Hygiene
- House Cleaning Supplies
- Car Payments
20% for savings and investments
- Short Term Bank Savings
- Emergency Fund
- Insurance (can be included in the 50%)
- Mutual Funds
- Stocks
- Cryptocurrency
30% for Entertainment or discretionary spending
- Going out to eat
- Subscriptions
- Hobbies
- Holidays and Travels
By sticking to a budget, you can manage your expenses effectively and avoid overspending.
3. Emergency Fund
Emergency funds are essential for unexpected expenses that can arise at any time, such as car or home repairs, medical emergencies, or job loss. As a general rule of thumb, it is recommended that you save at least 3 months of your expenses if you are regularly employed and 6 to 9 months if you are self-employed or a business owner. By having an emergency fund, you can have a safety net in case or emergencies to avoid financial stress and maintain your standard of living during challenging times.
If you’re still a beginner, you can set up your emergency fund by setting aside a part of your income into an accessible account or a personal vault, slowly building it up until you reach the desired amount. You need your emergency fund as liquid as possible, that’s why you need to set it up in an accessible account so you can easily access your fund in case of emergencies.
These are some of the emergencies you can prepare your fund for:
- Accidents
- Income Loss due to sickness or job loss
- Car or Home Repairs
There are multiple ways you can set up your fund:
- Bank Savings Account
- Cash
💡Best Savings Account for 2025
Cash Vaults You need to own
4. Managing Debt
Managing debt is crucial for maintaining financial health. The key principle is to prioritize paying off high-interest debt first while maintaining minimum payments on other debts. This strategy, known as the debt avalanche method, helps minimize the total interest paid over time.
Steps to manage debt effectively:
- List all debts with their interest rates and balances
- Pay more than minimum payments whenever possible
- Focus on high-interest debt first (debt avalanche method)
- Credit card debt usually has the highest interest
- Personal loans
- Student loans
- Consider debt consolidation for multiple high-interest debts
- Avoid taking on new debt while paying off existing ones
Remember: The faster you pay off high-interest debt, the more money you save in the long run.
5. Saving
Saving is different from having an emergency fund. Saving is intended for a specific purpose, such as buying a house, a car, or paying for a child’s education. To determine the amount of money needed and the urgency of the goal, divide the total amount required by the number of months and start saving that amount each month. Having a clear idea of your savings goals can help you stay motivated and focused on achieving your financial objectives.
Kinds of Savings
Short Term Savings
Short term savings are usually not longer than 1 year. These kinds of savings are meant for things that come up occasionally and not included in your monthly expenses. Some examples are gifts, travels, or parties.
Medium Term Savings
These are the kind of savings that may take years, examples are buying a car, a downpayment for a house, or a huge event like a wedding. You can put your medium-term savings into a time deposit or a traditional savings account.
Long Term Savings
Long term savings can also be considered as investments since it has a very long time frame. Retirement Fund is an example. These types of savings should be placed into an investment fund so you can make use of the interest rate and make your fund grow exponentially. Placing your retirement fund into a savings account will lose you money because the inflation rate is usually higher than most traditional savings account. If you’re a beginner in investing, consider putting your money into a low-risk mutual fund.
💡 Investing for Beginners
6. Insurance
Life Insurance provides financial support to your dependents in case of your death. The general rule for individuals with no dependents is to have at least 1 year of your income as coverage, but when you do you need to have 10 to 15 times your annual income. Having 10 to 15 years total coverage ensures your family can maintain their current lifestyle and be able to adjust in the following years.
You also need to consider if you have any debt, transferring of properties, child’s education, healthcare, and emergency fund.
Factors to Consider:
- Income Replacement: A general rule is to have 10–15 times your annual income to ensure your family can maintain their lifestyle.
- Debt Repayment: Include any outstanding debts like a mortgage, car loans, or credit cards that your loved ones would need to pay off.
- Future Expenses: Account for future costs such as your children’s education, healthcare, and other long-term needs.
- Emergency Fund: Ensure your family has enough for immediate expenses like funeral costs or medical bills.
Simplified Formula:
Life Insurance Needed = (Annual Income×Years to Replace)+Debts+Future Expenses
Example:
If you earn $50,000 annually, have $100,000 in debt, and want to save $150,000 for your children’s education:
Insurance Needed = (50,000×15)+100,000+150,000 = 900,000
Other Kinds of Insurance
- Health Insurance
- Disability Insurance
- Car Insurance
- Property Insurance
Choose the coverage that best fits your needs and budget since there are a lot of factors affecting the coverage and the cost regarding these kinds of insurance. Better consult a professional with this one.
7. Financial Goals
Financial goals are targets you set to achieve specific financial milestones, such as paying off debt, saving for retirement, or investing in a business. Goals should be specific, measurable, attainable, realistic, and time-bound (SMART) to be effective. Short-term goals, such as building an emergency fund, can be achieved in less than a year, while mid-term goals, such as saving for a down payment on a house, can take up to five years. Long-term goals, such as funding a retirement plan, take much longer to achieve but are essential for long-term financial security.
Short Term Goals
These usually take less than a year and should be achievable in a short amount of time. Examples of short-term goals are:
- Emergency Fund
- Travels
- Gifts
- That one dress you’ve been eyeing for days
Medium Term Goals
Medium term goals take longer but still achievable in the next five years if you put your mind to it.
- Buying a car
- Downpayment for a house
- A wedding
- Once in a lifetime travel
Long Term Goals
Long term goals focus on major life events that’s why these goals need to be reevaluated frequently.
involve planning for major milestones that require significant time, effort, and resources to achieve. These goals often span five or more years and focus on building wealth, securing financial stability, or preparing for life’s significant expenses. Here are some examples of long-term financial goals:
- Retirement Fund
- Investments
- Building a business
- Saving for a child’s education
Making a Financial Plan
In order to plan for your financial goals effectively, you need to consider all of the categories above. Here’s a simple approach:
- Set Clear Goals: Define short-, medium-, and long-term goals (e.g., emergency fund, house down payment, retirement savings).
- Assess Finances: Calculate your net worth, track income and expenses, and evaluate savings, investments, and debts.
- Budget Wisely: Allocate income using methods like the 50/30/20 rule to align with your goals.
- Build an Emergency Fund: Save 3–9 months’ worth of expenses for unexpected situations.
- Manage Debt: Use the avalanche or snowball method to pay off debt strategically.
- Save and Invest: Use savings accounts for short-term goals and investments for long-term growth.
- Protect with Insurance: Get life, health, and property insurance to safeguard your finances.
- Review and Adjust: Regularly update your plan to reflect changes in your life and financial situation.
In conclusion, by organizing your personal finances into these categories, you can create a comprehensive plan that ensures financial security and peace of mind. With the right tools and strategies, you can achieve your financial goals and prepare for a brighter financial future.