Personal finance is something that many need to have a grasp on in order to better manage their finances and debts. It is typically neglected because of the complicated work and confusing words involved. However, you can get your personal finances at its best by just simply following basic financial guidelines and properly tackle your debt without having to feel frustrated or angry. Here’s an overview of personal finance basics to help lower that debt!
Basics of Personal Finance
In order to have a good understanding of personal finances and debt, it is good to know the terminology used by finance professionals. You’re already aware of most of the wording they use because it is also used in tax papers and by CPA’s such as liabilities and assets. Both of these terms apply to how much you are able to save compared to how much you spend. When someone accrues debt, this is considered a part of their liabilities and that can mean owing too much in the long run.
So, when it comes to the first step of avoiding debt, there are few things to understand: the cause of debt, the effects debt has on your life, and how debts can be avoided. A simple tax equation really helps during this process and that is: Assets = Liabilities + Capital. To expand, if your liabilities are larger than your assets then you amass debt. It is also good to know the equation of Net Income = Gross Income – Expenses. When your expenses are exceeding your gross income then your numbers are going to dip into the negatives.
Knowing these two equations are the basics of personal finance. Once you have exact numbers from these equations, you can begin paying off debts and start actually saving your money for those rainy days.
How to Avoid Debt
Now you know the basis of personal finances and two important equations for managing them.Now figure out how to avoid bad debt and start clearing the current debt you have. It will take time but it is absolutely doable with the right kind of budget and know-how.
Here are few things to know about properly avoiding debt:
It is best to stay away from things such as credit cards with high limits and purchases on accounts because they can immediately lead to higher debt. Having these limitless opportunities to spend means losing control of your finances and placing yourself back into a situation with debt. If you can, only have credit cards with lower limits and make sure to only use them when you absolutely know you can pay back the amount on time. Smaller purchases like gas, for example, are best for credit cards. And as for purchases on account, they should be avoided altogether if possible.
Always remember that if you can’t pay off something completely or accrue debt, it is going to have interest attached to it. The longer you wait to pay it off, the more that interest is going to add up. So whatever debt you have, it should be paid off as soon as possible. On that same note, paying off interest is best with cash or further credit since it is not as beneficial as completely paying off debt.
And the most important one to remember is that paying off more debt than you can financially handle is not ideal. While it may seem like a good idea to pay off as much as possible in as little time as possible, it can cause a bad financial situation that leads to even more issues
When you think you won’t be able to pay something off in a timely manner, then it is best to try and avoid purchasing it or finding a new way to pay it off. Bill and tax collectors, for example, are willing to work with you in order to set up a payment plan that can work with your budget. Regardless, there are options for you out there so you can stop feeling the pressure of debt and get your personal finances in order.
Another route to consider is also taking out a loan. You don’t even have to leave your home in order to so anymore. But it is still wise to keep in mind the basics of personal finance and what you have learned about managing debt.Every little bit can help to take off the financial burden.