“Personal finance” refers to managing your short- and long-term finances, which includes saving and investing, planning for retirement, taxes, and estates, as well as banking, insurance, mortgages, and other investments. The term is also frequently used to describe the entire sector that offers financial services and advice to people and households.

How you approach issues of saving and investing is influenced by your individual tastes, goals and wants, as well as a plan to meet those needs while staying within your means. Being financially literate is crucial if you wish to maximise your earnings and savings, since it can help you to distinguish between good and bad choices.

Objectives

Short-term financial objectives help build your foundation and confidence to accomplish bigger, longer-term goals. In as little as a year, it should be possible to complete these initial steps:

• set a spending limit and adhere to it;
• establish a savings fund; and
• get rid of credit card debt that’s getting in the way.

Most people’s top long-term financial objective is to save enough money to retire. As such, try to calculate how much you would truly need for retirement, and have a conscious plan to reach that number.

Budget management

People require a means of tracking their monthly financial activities. A budget can give you a sense of financial control and make it easier for you to save towards your objectives.

Finding a financial tracking system/process that works for you can make a big difference in how you approach budgeting. Make it simple, not complicated. Here are some basic steps:

• determine your net income;
• track your spending;
• make sensible objectives;
• create a plan;
• modify your expense habits to fit within your means; and
• consistently review your budget.

Emergency cash

An emergency fund can prevent you from adding to the amount of debt you already carry, and to aid you in the event of a crisis. Financial experts agree that the size of an emergency fund should be sufficient to cover three to six months’ worth of living expenses.

Retirement strategy

Establishing retirement-income objectives and the resources required to meet them is a part of financial planning. This includes income sources, estimating expenses, implementing a savings plan, and managing assets and risk.

Although you can begin at any time, retirement planning works best if you include it as early as possible in your financial planning. This helps guarantee a secure, enjoyable, and safe retirement.

Repaying debt

Debt repayment helps reduce the amount of interest you would pay over time, free up money for savings and investments, and improve your credit score. Additionally, paying off debt can also help to reduce financial stress and improve your overall financial stability.

Here are two strategies a person might use to tackle debt:

1. Debt avalanche

This means paying all debts at the bare minimum. The remaining funds are then used to settle the loan with the highest interest rate. Once this large debt has been paid off, the person moves on to the next biggest one.

 2. Debt snowball

Debt snowballing involves ranking your bills from smallest to largest, paying the minimum on each debt, and then applying extra funds to the smallest debt first.

Which is the better approach? Theoretically, it is preferable to pay off the debt with the greatest interest rate first, i.e. using the debt avalanche method. But debt is frequently more psychological than financial.

Paying off smaller debts first can give you a sense of control, accomplishment, and inspiration. Small, overdue amounts of debt, on the other hand, may result in stressful collection calls from creditors.

Investments

Making investing a part of your financial plan can help you not only conserve money but make it grow. You might think an investment strategy is straightforward, such as “plan to trade stocks”, but it actually encompasses much more.

There are a few techniques to keep in mind if you’re keen to begin investing. One or a mix of these may form the basis of many long-term investing plans:

1. Buy and hold

This approach is founded on the notion that you should undertake thorough study before buying anything, choose your investments based on sound long-term logic, and then buy and hold on to them no matter what happens to the market value.

A buy-and-hold investor should only sell when one of two things happens:

• when the fundamental factors that drove your decision to buy the shares change – for example, when the company’s management team adopts a new business strategy that you don’t agree with; or
• when you want to completely get out of the market.

A downside of this approach is that you might simply be incorrect in your decision, and might suffer a significant loss before you give up.

2. Value investing

With this, equities that are undervalued in relation to the rest of the market are sought. This entails searching for businesses that appear to be expanding quickly but have not yet drawn much attention from the market, or for up-and-coming competitors with excellent fundamentals and room to grow.

Value investing involves more frequent stock purchases and sales. Consider selling and moving on as soon as your picks appear to be “priced in” or “overvalued”.

This approach requires you to keep a close eye on businesses and periodically reassess what you believe they are worth. If you make a series of errors, it could be difficult for you to recover.

This article first appeared on MyPF. To simplify and grow your personal finances, follow MyPF on Facebook and Instagram.