The Basics of Handling Your Personal Finances

We’ve all generally been bashing the formal schooling system for not teaching real-world skills like how one should handle their personal finances, something which would entail learning areas such as budgeting and basic financial arithmetic. While all those things were actually being taught all along, it was perhaps just a case of not clearly defining the link.

I mean financial arithmetic has always been taught in schools, up until a certain point at which learners who want to pursue a career on that path start specializing somewhat, so too topics such as budgeting. Aided by a willing memory of course, if you were to personally look back at your basic schooling days I’m sure you could go back to a point at which you can point to a budget being the lesson of the class.

The problem is that educators who are imparting these lessons have a lot of others to teach as well, some of which others perhaps take priority in the formal exams and standardized tests. Consequently, there isn’t too much of a fuss made about the likes of how to handle your personal finances and the lessons taught aren’t explicitly linked to their importance in the “real-world”.

So in walking you through the basics of handling your personal finances, you might feel like you actually knew all this stuff and that is a feeling which is totally justified. You do know all this stuff – the knowledge is stored away somewhere in your mind and you perhaps just need someone to locate and organize it for you so that you can see its practical implementation value.

So here are the basics of handling your personal finances:

  1. Work out your total income
  2. Create a budget
  3. Create and implement a financial plan

They’re pretty obvious, aren’t they? They’re not new concepts to you, are they?

We need to look a little closer though because working out your total income (1) isn’t a simple matter of looking at your income pay stub. You know by heart how much money you earn, but working out your total income needs to take the form of subtracting all your expenses from your gross income so that you come up with a net income.

Of course this would be done taking into account those expenses which you aren’t in control off, i.e. fixed expenses which you do not determine the fluctuations of. You pay a certain amount for your accommodation, for example, but only if that accommodation is paid for automatically via a subtraction from your salary.

Once you’ve separated your fixed expenses from tangible ones, you can create a good budget (2) by looking to save as much money as possible through your spending habits. This would then lead to formulating a longer-term financial plan (3) in which you incrementally seek to build up your wealth base.

The aim is to be in a better position financially as time goes by, not sink deeper and deeper into debt or economic slavery.

Jerry Kirkham is an investment professional, and like every investment professional, he makes mistakes. Jerry encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at Essential Savings, or anywhere else Jerry may write is an invitation to buy or sell any particular security; at most, Jerry is handing out educated guesses as to what the markets may do.