What Is Personal Money Management?
In a nutshell, personal money management is the process of tracking, planning, and handling your personal finances. To zoom in a little bit more, you can actually break it down into five major elements: cash flow, investing, budgeting, saving, and protection.
The Five Elements of Personal Money Management
More than anything, the number one reason an individual fails to plan for the future is a lack of awareness. Knowing what is personal money management allows you to create a roadmap to financial freedom. Let’s dive a little deeper into the five components that make up this roadmap.
1. Cash Flow
Cash flow pertains to the main activities of your finances. It includes how much money is coming in from your income generators and how much you’re spending.
Speaking of income generators, you can set up other income streams aside from your employment through investments. You can do this by putting up a business or by buying various financial products.
The third element of personal money management is budgeting. It is the process of keeping track of all of your expenses and making sure that they don’t go beyond your cash inflow.
All the extra money you don’t invest or spend on expenses should be added to your savings. It would be best if you prioritize setting up an emergency fund account. It is a savings account that you can tap into in case of unforeseen events that can ruin your budget or put you in debt. Having multiple savings accounts is ideal too.
Finally, you can also put away your money through other financial products dedicated to protecting your financial stability in the future. Different insurance plans are examples of these.
The Benefits of Being Financially Literate
Understanding the five fundamental elements of personal money management will help you make smart financial decisions when needed. Aside from that, being financially literate has many more benefits in store.
1. Faster Accumulated Wealth
Financial literacy increases your chances of accumulating wealth faster. Want to get rich? Knowing how to manage your expenses, establish savings, and invest wisely can put you at an advantage towards that goal.
2. Lower Risks of Bad Debt
Financial literacy will give you the wisdom to distinguish good debt from the bad. You will also be able to leverage credit so that you can land opportunities that are otherwise out of your reach at the moment.
3. Good Credit Score
Since you know how to handle debt, we have no doubt you will achieve and maintain an impressive credit history and credit score. In turn, this can then help you enjoy more opportunities and might even lead you to your dream job, car, house, or vacation.
4. Inner Peace
Smart financial decisions can keep you protected through your wise investments, insurance plans, and savings. You will also feel compelled to build your retirement savings early.
Financial literacy can, therefore, help you feel more at peace. It can even promote better mental health since money is seen as one of the biggest stressors these days.
The Consequences of Financial Ignorance as a Millennial
Yes, financial literacy certainly has its sweet advantages, but what lies on the other side of the coin? That would be financial ignorance, and it awaits with dire consequences.
1. Quality of Life at Stake
Living from paycheck to paycheck is not a life that anyone would enjoy being burdened with. Unfortunately, though, it is one of the unfortunate ramifications of financial illiteracy.
2. Business Failure Upon Business Failure
Another consequence of financial ignorance is business failure. While not all businesses take off, consecutive business failures are a big clue that you’re not making the wisest financial decisions when needed. What’s worse is that it can leave you bankrupt.
3. Considerable Debt
Filing the bankruptcy of your business is one thing, but personal bankruptcy is an entirely different story. It is one of the unfortunate aftermaths of debt. The sad thing is, a lot of millennials today are at risk of high-risk debt due to poor financial education.
Don’t Be a Broke Millennial
Don’t fall for it! Ignorance is a crime, especially during this digital age, when you can learn just about anything online. Don’t be a broke millennial. It is not a life that we would wish anyone to live.
The Physical Toll
Often, you will hear people say, “we can manage if we’re poor, as long as we’re healthy.” To be honest, that just made us cringe a little bit. We’re sure that these people don’t realize the health repercussions of being broke.
Being broke means skipped meals and generally poor nutrition because of limited food choices. Also, being financially challenged means limited access to healthcare services, treatment options, and even prescription medicine. If you’re working on a limited budget, you are also less likely to spend on vitamins, which could have further boosted your immunity.
The Mental Toll
Holistic wellness doesn’t depend on one’s physical health alone. We can’t stress the importance of mental health when it comes to an individual’s overall well-being. Unfortunately, financial challenges tend to make you more vulnerable to stress and unhealthy thoughts.
Oddly enough, those who struggle financially are more inclined to spend money on products to compensate for the things that are lacking in their life. Hence, wearing designer brands while broke can make you feel like a fake, even if you did work hard for the money to purchase them.
On the flip side, being broke can also create feelings of defeat and guilt, even if you stay on top of buying items that do add value to your life.
Enjoying products and experiences pertaining to self-care, for instance, can be challenging to do while broke. You will always have that itching feeling that you’ve made the wrong decision and that you should have spent the money on more important things, such as food or utilities instead.
Getting knowledgeable in personal money management allows you to be on top of your living expenses, making it easier to allocate funds where they are needed. If you become financially responsible, you’d be able to move on from living life paycheck to paycheck. Even better, it would be easier for you to save for the future and not fall victim to debt.