When it comes to finance, we all need a plan. Especially, if you are constantly stressed out by your bills and empty pockets. Either you really desperately need all these things, or you’re just falling prey to the ‘I need this as well’ trap. In which case, you should learn to manage your personal budget.
This is not about setting limits. This is about allocating your money properly and not leaving budgeting to chance. The rule of thumb – SPEND WISE – is not enough. You need to develop certain financial habits and stick to them. Below are some of the most vital rules you should follow to improve your finances.
Calculate or what is a financial health check?
Do some math. Crunch those numbers. Don’t be afraid to get lost. Start with your personal net worth. To calculate it, see what you own and what you owe. For example, your car is what you own. Your student loan is what you owe. The difference between your assets and liabilities makes up for the net worth. The figure will change over time. Based on your net worth, you can proceed to compile your spending plan. It will help you know your expenses and prioritize savings.
Your plan will definitely include at least two categories, these are income and expenses. Income is typically split into a variety of classes: salary, retirement income, education, savings, utilities, etc.
Thus, you’ll get a clear, honest picture of how you are going to spend.
Stop spending fiercely or how can your promotion devour all your money?
The phenomenon is called lifestyle inflation. The more money you get, the more you spend. As you move further along your career path, your needs increase exponentially. Looking back at your student days, you have no idea how you managed to live on such a modest sum. Remember the time when you landed your first job, you have no idea how you managed to live by the paltry sum of money you were paid. Every step up in your career drives you to spend more. You suddenly crave all these nice trifles, new clothes, expensive furniture etc.
Things, things, things. The solution? Just stop. Value experiences over everything or start saving.
Prioritise or how do needs and wants differ?
First, learn to differentiate between ‘I need’ and ‘I want’. ‘I need’ is what you can’t do without. ‘I want’ is something you can do without. As simple as that. Before you buy another pair of shoes, ask yourself ‘Do I need it or I just want it?’. Answer honestly. Weigh your every purchase and assess its true value, does it pay off? Over the time you’ll learn to make smarter choices.
It would be great to make a list of your ultimate needs. It will feature food, water, and a roof over your head, hygiene products and a limited number of clothes you feel comfortable in. This is your minimum. A minimum to survive you may add. No. You can live a full life with a basic kit of things. Just learn to prioritize.
Save or how to get $48,000 by the age 60?
Start saving right now. The younger you are, the better. Most people think they can spend all their money until a certain age hoping they will compensate it later. The principle doesn’t work and may cost you a lot.
Nothing illustrates better than examples. Assume you are a 20-year old man. You put aside $100 a month. By the age 60 your personal fund will be $48,000. Sounds impressive, doesn’t it? Also, assume you will be able to put aside more each month and add to your savings.
Start saving as early as you can, and make your retirement a little brighter.
Prepare for the worst or what if you don’t get insurance money?
Sounds weird, but you better do it. Having an emergency fund has never killed somebody, keeping a stash of money in case you’ll find yourself in an unpleasant situation is a good thing. Apart from being extremely stressful, these nasty surprises can cost you a fortune.
Life is full of things that happen out of the blue. Natural disasters, car accidents, diseases, unemployment. That emergency fund comes in very handy and works as a safety bag. People often rely on insurance, but they forget that sometimes it takes years to get paid.
What’s it all about?
The ability to manage your personal finance is as important as any other skill. And like any other skill, it doesn’t come easy. The earlier you start developing the right budgeting habits, the less the risks are that one day you are going to find yourself in financial distress.
Start with a spending strategy. Embrace financial planning and analysis. Learn to save. These are the basics that won't let you go belly up, and they’ll help you handle any disaster that may take over your bank account.