The Basics of Personal Finance – Know These 5 Things Before Fixing Your Finances

Today’s guest post comes from Allan Liwanag. Allan is a personal finance blogger who owns The Practical Saver. He blogs about family, life, and money. He’s a family man who paid off his $40K of debt and saved $70K, at the same time, in 2.5 years while living on one income. You can find him on Pinterest, Twitter, and Facebook.

A lot of us aspire to get a good handle on our finances. Some of us find that the best way to do so is by hiring professionals. Some try to handle it by educating themselves. The truth is there are countless ways to fix your finances.

Of course, your personal financial situation may be the same as that of the other people you know or it may completely be different. Having said that, there are basic things that you need to know about personal finance. Here are the main five:

Know Your Financial Situation

Have you ever solved a problem when you didn’t know what the problem was in the first place? Probably not. If you have, then you are a problem-solving mad genius. But really, in order to fix your problem, you must first know what your problem is. The same reasoning applies to fixing your finances.

You need to understand what situation you are in, how you landed there, what the repercussions of this situation are to you, among others. It is by understanding your situation that you learn how to figure out where you made mistakes. You are able to find solutions or formulate plans. This is how you learn and become better as a person.

Understand The Difference Between Needs And Wants

Needs and wants are two different words with completely different meanings. However, a lot of people get these two words confused.

Nowadays, distinguishing a need from a want is somewhat difficult to do. There are so many products and services in the marketplace that are just wants but disguised as needs. For example, a lot of people will say that they need to buy new iPhones or Samsung phones because of the functionality, the style, and the features. They say they need these phones; but in reality they just want them.

I am not saying that buying products that you want is a mistake. What I am saying that if you are trying to fix your finances, the best thing you can do is to identify what your needs are and stay away from what you want. Needs are necessities that you take care of to live. As for wants, they are something that you can live without.

Remember even small savings can make a big impact in fixing your finances.

Make A Budget

Budgeting should be a must for everybody. Whether you have a ton of money or just a few dollars, it is always beneficial to make a budget. It helps you identify the areas you are under-spending, overspending, or doing just right.

Don’t fall into the trap of telling yourself that you don’t need a budget because you don’t have enough to budget for in the first place. This is the wrong assumption.

If you want to fix your finances, you need to learn what your finances look like. Having and using a budget can help you see where your money is going.

Remember, a budget should be realistic not just something that’s good on paper.

Execute And Follow Your Budget Faithfully

A budget is created for a purpose and it’s good to have one when you are trying to fix your finances.

You should execute and follow your budget faithfully. Of course, following it faithfully is easier said than done. You may need to sacrifice things to make your budget work. Following it, sometimes, equates to sacrificing.

Many people think that a budget is restrictive and calls for deprivation. It really isn’t. A budget is a tool, not a rule. You can always adjust or change it to reflect changes in your situation. There are situations in our lives that we can never control. If these do happen, you are more than free to change your budget.

Of course, while I say that your budget can be flexible, it doesn’t mean that you need to change it whenever it is convenient for you. A budget should not be implemented out of convenience but out of a need.

Save

When you are fixing your finances – which most of the time means paying off your debt – you may think that saving should be the last thing on your list.

What would happen if you keep on paying off your debts white not saving enough, and then some emergency situations arise? Where would you get the money? Would you borrow again because you don’t have money saved? These are the questions that you need to answer when things you don’t have control of occur.

It is in your best interest to save as a part of your strategy in fixing your finances.

I don’t know if it’s just me but I like to see the fruits of what I do to improve my financial situation. I like to see that my money in the bank continue to increase while I continue to address financial situations. It may sound crazy, but seeing more money being saved keeps me motivated to continue to better my financial situation.

What are you doing to fix or improve your finances?