Personal financial management is mix of art and science, as there are many objective and subjective elements to consider. Regardless there are a few basics of personal financial management that everyone needs to understand and implement.
These fundamentals included creating and maintaining positive cash flow, saving and investing consistently and maximizing employee retirement benefits. These pillars of sound financial management will help you improve your financial situation and could lead to financial freedom.
Cash Flow is Everything
One of the largest challenges in the financial planning process is maximizing positive cash flow over time. This is due to the fact that, in most cases, our incomes are capped at a certain level. Quite often it is easier to cut expenses than it is to grow our income. So with that said, to create positive cash flow over time we need to maintain an active role in the execution of our budgets.
It is easy for spending to get out of control. Over time loose budgeting and spending can get us in a financial situation that is difficult to recover, not to mention never accomplishing our financial planning goals and objectives. Positive cash flow is the most important element in personal financial management, ensure that you are spending less than what you earn.
Save and Invest Consistently
No matter the current economic environment, time is on your side. Research has shown that most successful savings and investment strategies are consistent and diversified. Consistent investing (investing a set amount every month) leverages the ebbs and flows of stock market fluctuations.
The most experienced investors and robust trading algorithms cannot predict market moves every time. This is why we must save and invest in the bad times just as often as the good time. This not only ensures that you keep your saving rate as high as it can be, but it also takes advantage of market environments that are advantageous to investors (such as dollar cost averaging).
Maximize Employer Retirement Benefits
Over the years employees benefits, such as retirement plans, have become less and less generous (for the lack of a better word). Employers that once reward employees with defined benefit plans (pensions), have effectively converted their business liability into market risk, borne by you the employee and investor. They did this by reducing the amount of defined benefit plan and started to implement defined contribution retirement plans.
Regardless of this shift, you still need to make a valiant effort to maximize your employee retirement benefits such as your 401k. Tax advantageous plans such as these help you reduce your tax liabilities and maximize your savings rate. These are two very important elements in a sound personal financial management process.
Implementing these three basic personal financial management elements in your financial plan will help you improve your financial situation. These “no brainer” financial planning fundamentals are often overlooked, ignored or underrated. Every expert will tell you that creating an budget with positive cash flow that allows you to consistently save and invest in tax advantaged retirement plans is sound financial planning.