Why knowledge is power when it comes to understanding your financial situation

  • Leanne Lancaster, Personal Finance Writer
  • 06 November 2023
  • 5 mins reading time

It's often said that knowledge is power, and when it comes to personal finances, this saying couldn't be more true. Having full awareness of your financial situation is the first step on the path to achieving financial wellbeing.

Why knowing your financial situation matters

The first and most fundamental step in managing your finances effectively is knowing where your money comes from and where it goes. By understanding your income, expenses, debts, and savings, you can create a budget that allows you to live within your means, save for the future, and avoid unnecessary debt.

One way to help you gain this view is through cash flow modelling. This is a tool which can help reveal how your current financial situation measures up against your life goals. It can also help you assess the financial impact of any changes to your future plans. A financial planner can explain how your future financial position might be affected by a range of scenarios, such as retiring earlier or later than expected.

When you're aware of your financial situation, you can set realistic and achievable financial goals. Whether it's buying a home, sending your children to university, or retiring comfortably, having a clear picture of your finances enables you to plan for these milestones with confidence.

A solid grasp of your financial situation will allow you to build an emergency fund to cover unforeseen events, helping you avoid falling into debt or financial crisis. We suggest building an emergency fund of six months of basic expenses to cover any unpredictable or unexpected expenses which could arise at any time.

Financial stress can take a toll on your mental and emotional wellbeing. Being informed about your finances could bring peace of mind, as you have a clear plan and the confidence to face financial challenges.

How to gain financial knowledge

Here are three simple steps to help you gain financial knowledge and empower yourself to make informed decisions about your finances.

1. Understand your financial position by creating a detailed financial statement which should include:

  • Income - List all your sources of income, including your salary, investments, rental income, and any other sources of money coming in.

  • Expenses - Keep track of all your expenses, both fixed (e.g., rent or mortgage, utilities, insurance) and variable (e.g., groceries, dining out, entertainment). Categorise your expenses to identify areas where you could cut back.

  • Assets - Inventory your assets, including savings accounts, investments, property, vehicles, and valuable possessions.

  • Liabilities - Document your liabilities, such as mortgage, student loans, credit card debt, and any other loans or financial obligations.

A well-structured financial statement could give you a clear overview of your financial health.

2. Determine your financial objectives, both short-term and long-term. Be specific about what you want to achieve. Your goals could include building an emergency fund, paying off debt, saving for a holiday, or planning for retirement. Having clear goals gives your financial decisions purpose.

3. Consider consulting with a financial adviser or planner. They are experts in the field and can help you:

  • Create a personalised financial plan tailored to your goals and circumstances.

  • Offer guidance on investments, retirement planning, and tax optimisation.

  • Keep you updated on financial market trends and opportunities.

While there might be costs associated with professional advice, the potential benefits in terms of financial stability and returns could far outweigh the fees. At Schroders Personal Wealth, there are no hidden fees or charges and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.

Understanding your financial situation is not a one-time task; it's an ongoing process. Regularly reviewing and reassessing your financial status is essential to adapt to changes in your life, goals, and economic conditions. It’s also important to remember when investing, that the value of investments and the income from them can fall as well as rise and is not guaranteed and you may get back less than you invest.

It is through this knowledge that you can achieve financial wellbeing and peace of mind. It's not just about making more money; it's about using what you have wisely.

Important information

This article is for information purposes only. It is not intended as advice.

Fees and charges apply.

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

In preparing this article we have used third party sources that we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

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We'll begin with a free, no obligation conversation to understand if our service is right for you. There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.

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