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Financial Management – How to Manage Money (2021 Guide)

Till a few years ago, words like Finance, Money, Capital were not talked about much. And if anybody did, people were like – ‘Oh! He’s talking about money. He’s a capitalist. He has money on his mind. He is money minded! Blah! Blah! Blah!’ Nobody talked about Personal finance, financial management or independence.

But the time has changed drastically now. With a rise in the number of millionaires and billionaires around the world, people are awakening their thought process about money. They now seek information about money, finance, personal finance, money management, etc. Because more people want to grow and manage their wealth. Financial Independence is the new common goal.

Let's start

You too are here today, aren’t you? Because you want to learn about finance, money, and ways to manage your money. I too had been at your place. Therefore, now I have got your back.

In this article, I’ll be talking about Financial Management. I’ll tell you how to manage your Personal Finance and achieve Financial Independence.

 Before getting into Financial Management, if you have doubts about what Finance is, what does it mean and everything –  

Refer to this category and read!! Personal Finance

Introduction to Financial Management

Financial Management

Don’t worry. It is not as clumsy as it seems from the picture! Moreover, many financial analysts, authors, and industrialists have defined Financial Management in their own words. In case, I would like to mention one such definition –

J.F. Bradley, an established author, defined it as – 

“Financial management is such an area of management that is devoted to just the use of capital & money. It is a careful selection of your income source so as to regulate better spending and saving habits.”

Any business model or personal budget revolves around finances. It serves as a lifeline. And a lifeline generally is limited while the will to live is unlimited. In a similar sense, Finances are limited, but the wants and wishes of an individual are – unlimited. Thus how would you fill the gap between limited finance and unlimited wants?

You do Financial Management. You manage your finances. Upon managing your finances regularly and efficiently, you achieve a sense of Financial Freedom. And this is something that explains the Purpose and Significance of Financial Management in short.

Why Study this topic?

Managing money, i.e., saving, investing and compounding, is an art, and the term that covers this concept is called Personal Finance. It covers a lot more concepts such a Budgeting, Banking, Insurances, and wise Spending too! This term refers to the entire finance industry or other industries that involve money.

Some key aspects of Indulging into Financial Management –

1.Reducing the cost and expenses

Once you get the hang of managing your incoming and outgoing money, you also get a hold on your expenses and widen the gap between Income and Expense.

2.Having more savings and ROI (Return on Investment)

The more you widen the gap between your income and expenses, the better you can save. Once you start saving more, your ROI eventually rises.

3.Creating the best case of usage of money

 Have you ever thought that you do not get to spend according to the money you earn? No matter how much you earn, there is always a gaping hole that stops you. That can be filled by financial management, i.e., you can use your money the best way possible.

4.Ensuring constant availability of liquid funds

Managing your money, saving it to the extent that you get more freedom. You won’t have to be scared of uninvited troubles because you will have savings. You will have liquid money stored safely for such critical times.

5.Overall dealing of finance in order to maintain, hold, buy assets and liabilities

The better you learn to manage your finances, the more you will have the chance to build your empire by buying and holding assets.

As we saw in the points above, Financial Management is also used in the Business world. Well, it’s used more in the business world, I must say. To study Business Financial Management – Read this Article.  

However, in this article, we are emphasizing on personal financial management.

Studying the Scope of Financial Management

It is very important for an individual that his/her financial decisions do not affect the present and future prospects. One’s goal is always to have sufficient money to live and enjoy and to have enough savings & investments for the future.

Furthermore, the goal of maximization of wealth is one thing that is growing rapidly. Considering these factors, we can divide the scope of financial management into the following parts –

  1. Income potential
  2. Saving Prospects
  3. Investment decisions

Let’s talk about each one by one –

Income Potential: 

Before talking anything about saving, investing and planning finance measures, one must take into account the income he/she receives every month. Unless you have an idea of how much you get or how much more you can get, it’s hard to plan finance foolproof.

Therefore, knowing and increasing your income should be the first scope to think upon. Talking about Income, you can have multiple types of income. For example –

  • Active income – It is the income you earn by trading your time. For example – Daily job workers – corporate/government employee, Shop owner, Agents, etc.
  • Passive Income – The income for which you do not need to exchange your time is called Passive income. You work for once, or maybe twice and then its done. For example – YouTube channel, Established Business, Digital sales, etc.
  • Dividend Income – The income that you get when you invest in shares that pay a dividend.
  • Interest Income – This also comes from investment and by lending private loans. Investments fetch you a yearly ROI (Return on investment) called the interest income.
  • Commissions & Royalties – The money you get for providing a small service or setting up a product. Commission can be referred to the income you get as an agent. Example – Real estate broker gets a commission, and advisors get a commission, etc. As for Royalties – The authors are the best example. Write one book, publish it, and you’ll be getting royalties for the book for every sale.

Saving Prospects:

The moment you rectify and wonder about your income and income potentials, the next step is to think about saving and start as soon as possible. I do not need to specify and emphasize more on the Saving topic because I’ve talked a lot about it. You can check our other articles – Here!

What I will be talking about here is – How saving helps you in rectifying your income potential and the investing scope too.

As far as income is concerned, the more you build up the habit of saving, the more you can make out of your income. Saving habit also rectifies your spending habits. You start thinking about all the expenses you’re going to make. This reduces your tendency of wasteful expense.

Your savings and the rate at which you save matter a lot in the investment prospect too. It is pretty obvious that the more and faster you save, the more you can invest. The more you invest, the better results you get overtime. Thus, you become Financially Independent.

Because having more capital results in better interest favors.

Investment Decisions

Now that you have analyzed your income and savings, all that is left for your financial management to take off is – Investment.

I have talked numerous times about investment, a different form of investments, areas to invest and everything.

But here I would like to tell you why investing is better than just saving. Imagine a scenario – 

You have $5000, and you put them in a bank that gives 4% interest every year. After ten years, you will get $7000. Addition of $2000. That’s good, right? But remember Inflation! Inflation rate per year 5-6% that means you did not get $7000, your money lost its value.

Now, if you had invested the same amount at a normal rate of 10%, your corpus amount after ten years would be approximately $13000. More than double!

Do you see the difference between 4% and 10%? Which one sounds better, $7000 or $13000?

I guess you understand now. I do not need to explain any further. You are pretty much done with the part of financial management!

Conclusion

conclusion

This was my input on Financial Management. If we are, to sum up in short – Managing your money is to better your lifestyle. Along with saving and investing for the future, you can get rid of being scared. Your financial management is a part of personal finance planning. It incorporates your spending habits, rates of saving and investing.

Collectively, to broaden the gap between your incoming and outgoing money, you manage your finances. It also talks about increasing your income and limiting expenses. However, it is also not recommended to close your hands and stop spending at all. It is your money, and you have worked hard for it. It is your right to enjoy and spend. But, keep in account your finances and budget. Oh yes! Have a Budget! Read more about it here.

Happy saving! Happy investing!

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