Saturday, December 17, 2011

Why You Should Manage Your Personal Finances

I've been regularly posting on my blog for more than half a year already, yet I think I have neglected one of the most important topics that need to be addressed: why should you even bother learning about personal finance?  Of course, some of us may automatically say "obviously, it's to have more money."  But that isn't the real reason. There is a reason why we even want money in the first placeso that we can pursue our interests and find what makes us the happiest.  Everything always comes down to seeking happiness and how it comes to each and every one of us is almost completely unique.

Overall, the main concept of personal finance is to limit your spending now to be able to spend more later on.  It is a very difficult self-control process that requires us to think about our future selves and make decisions for the benefit of them.  Consuming things now (going out to eat, getting a massage, buying that new video game) make you happy but you will also want to consume things in your future.  You may have income now and income in your future but the future is always uncertain.  What if you lose your job or get a pay cut?  This is where emergency or normal savings step in.  Things don't always have to be a disaster to necessitate managing your personal finances either.  What if the cost of food and energy go up while your income stays the same?  Over time, you may need to find more money to sustain your daily life.  You need to save in order to prepare for the future.  As college students, we may not think about this a lot since we don't yet have a full-time job.  Those of us coming to college on financial aid and with part-time jobs already have some experience with this, and it's important to realize that living paycheck to paycheck is a pretty dangerous lifestyle.  You want some sense of financial security to help maximize your happiness while consuming the things that also make you happy.

It may seem like it's quite simple to just draw up a personal finance plan for you.  However, there is no one formula for how to manage your personal finances because we all get happiness in different forms.  With wealth, you can worry less about making more of it.  You won't be in a critical financial mess and have to worry about paying for debt you've taken on or if you have enough income to sustain your expenses.  If you aren't worrying about income, you won't have to work as much or at all and you will have more time to spend with friends and family or pursuing those interests.  And generally, all these things are what ultimately increase our happiness.

Pretend like you are looking at a timeline of your life from now until the day you die.  Also pretend that you are able to choose how much to consume in each year of that time line and that you have 100 or so blocks of happiness that you can stack on this time line.  Would you stack the blocks evenly across all years or put most of it now and leave very little of it left for the future?  Depending on your answer (which doesn't necessarily have to fall under the two options I gave), your method of managing your personal finances will be different.  For the person seeking constant consumption of those blocks of happiness, that person will need to strike a balance between current spending and savings.  For the person pushing most of the blocks forward, that person will be able to spend more now at a greater cost of spending less in the future (hopefully not cursing the, now present you).

One thing we, as college students, may not realize is that our actual consumption will probably look like a mountain range, peaking at significant points in each of our lives (e.g. our wedding/honeymoon, buying our first home, sending kids to college, etc.).  There are bound to be points in our lives where we will need to spend a lot more to do the things that we want and it is important to realize early on that we have to be financially conscious to plan correctly for those times.  Preparation is critical so that we don't get surprised by sudden events and maintain adequate control over what can happen to our financial situation.

I may recommend a lot of different personal finance tools on this blog.  I think everyone should  be aware of  how to budget their expenses, but you should also take my advice with a grain of salt.  Not everything on this site will be good for everyone.  For example, I think credit cards are great short-term financing tools that can earn you some cash on the side, but if you are someone who is prone to impulsive spending, it probably isn't the right thing to use.  I mention Southwest as my preferred airline because of its simplicity and low cost, but if you get a lot of enjoyment out of the frills some of the other airlines offer, then go for it.

The last thing I want this blog to do is tell you how to live your life.  Each of us has his or her own preferences and desires.  Don't follow everything I say in this blog but do take in the information and know that those options are available.  Managing your personal finances may take a little work but I believe the benefits will definitely be worth it.

1 comment:

  1. What a helpful article! I have been looking up information on structured settlement loans when I came across your article. I just want to say thanks for putting such an informative article out there. I will be re-reading this to use some of the tips. Thanks so much!