Have you ever wondered why you are having financial trouble regularly? If you don’t know how to manage your finances well then no matter how high your salary is or how profitable your business is, you will feel that you are running short of finance. So, learning to manage your finances is very crucial to a person’s financial well-being.
What Is Personal Finance?
Personal finance is the money that belongs to individuals and households. Personal finance includes banking, insurance, mortgages, retirement funds, investments, real estate funds, tax, and others. Managing personal finance means to spend the money earned wisely, saving up, and investing the money to increase your fund.
How To Manage Personal Finances
Most of us only realize the importance of managing personal finances well when we go through financially tough times. Those days feel uncomfortable and awkward. Sometimes we feel scared thinking about the uncertain future. But if we can make smart financial decisions from an early stage in life, then we might never have to come across financially struggling moments. Financial stability not only ensures a bright future but also improves relationships. Here are some ways you can manage your finances.
Create A Monthly Budget
You should take time to create a realistic budget every month. Consider your spending habits and the money you bring home to calculate the budget. Leading life on a budget can encourage good habits. For example, if you are used to dining in a restaurant 6 times a month, then you can think of cooking at home sometimes to stick to the budget. When you eat food cooked at home, it’s healthier. To calculate a budget you need to first add up your total monthly income. Then you add up your monthly expenses. The amount you get after subtracting the total monthly expense from the monthly income will be your budget for paying debts, saving money, or investing.
Track Your Spending
At the end of the month, many of us can’t remember where all that money went. It can be very frustrating in such situations. So, keeping track of your spending is important. It shows where you are spending more and how you can save up money. Today money management apps like MoneyTrack, Wallet, PocketGuard, and others are available to help you keep track of your spending across various categories like spending on essentials and non-essentials.
Create An Emergency Fund
Every household should have an emergency fund. We may be faced with unforeseen circumstances anytime and we must be prepared for such events. For example, any of your family members may fall ill and hospitalization may be necessary, or you may lose your job. If you have an emergency fund then you won’t have to take a loan from the bank at a high interest rate to pay your monthly bills. So, every month, try to keep some money aside for your emergency fund. Having an emergency fund by your side will reduce your stress related to finance. As you will have psychological safety, you will be able to stay calm in difficult situations. It is recommended that you automate the savings amount.
Pay Bills On Time
It is always best to set up a direct debit on your account for paying bills. That way you will never miss paying bills on time. A good payment history can boost your credit score and you may get loans at low interest rates in the future. You will also avoid late fees when you pay bills within the due date.
Reduce Recurring Charges
Many people subscribe to mobile apps or streaming services. Even if you don’t use these regularly you are charged every month. So, you should review these recurring charges and cancel the subscription of those apps or services that you don’t use anymore.
Make Big Purchases With Cash
Credit card companies often offer ‘0% interest’ or ‘buy now pay later’ options for big purchases. Don’t get into these traps. They play with people’s psychology. The moment you know that you don’t have to pay anything till the next year you will be reluctant to pay early. Then once the deadline is crossed, you will be charged a high interest rate. Try to save up money and use cash to purchase big items like a camera, TV, or refrigerator.
Have An Investment Strategy
It is a good habit to contribute small amounts to investment accounts. This will generate more income. Many employers provide 401(k) matching which is very helpful after your retirement. You can also consult your friends and colleagues for any investment opportunities. You must make a diverse portfolio of investments to reduce risks. Examples of investment opportunities include real estate, stocks, bonds, venture capital, private equity, and others. You should start investing money at an early stage of your life. At that time you will have the scope to take risks and get high returns. But as you grow old you need to invest in things that have low risk and in such cases your return will be low.
Save For Retirement
It is a fact that you won’t be able to work after a certain age. You need to plan for that time well ahead. So, start a retirement fund early so that you can enjoy financial strength when you grow old. You can consider several options like the 401(k) plan that you get through your employer. A regular amount is deducted from your paycheck every month to create the retirement fund. You can have an individual retirement account as well. As these funds work on a compound interest basis, starting your retirement plan early can increase your savings.
Set Financial Goals
If you have a long-term financial goal then you will not overspend your money. For example, if you are planning to buy a house or send your kid to college within a few years then you will have the urge to save more money rather than spend on unnecessary things. Retirement should be part of your financial goal also.
Avoid Debts
You should avoid all kinds of debts like loans and credit cards. The interest rate on loans and credit cards can be high and it will put you in financial stress every month. Using credit cards to purchase things is a bad habit and it encourages you to spend more even when your salary isn’t enough to cover the expenses. In case you need to take a loan or use a credit card, pay off the money as soon as possible to avoid high-interest charges. Delaying the payment can hurt your credit score. You can follow the snowball or debt avalanche method to pay off your debts. In the snowball method, you first pay the smaller balances. Then move on to paying the bigger balances. In the debt avalanche method pay off debts with the highest interest rate first.
Take Advice
You should talk to a family member or friend for advice regarding personal finance management. If necessary, hire an expert to help you craft a payment plan. A financial advisor may help you to save more and pay off your debts quickly. Your stress will be considerably reduced when you hire an expert.
Purchase Insurance
You should apply for health insurance early. Healthcare is very expensive and as you age there is no way to hide from medical expenses. Having health insurance can save a lot of money and keep you stress-free. You can also purchase life insurance for your family. It will give you the peace of mind that when you are not around, your family members won’t suffer financially.
Utilize Tax Breaks
You should maximize tax savings so that you can use the money for other important purposes like paying debts. You should keep the receipts of all your purchases and track your spending to find out any tax credits or tax deductions. That way you won’t pay high taxes.
Conclusion
If you want to save money, having the right mindset is very important. Even if a lot of wealth is available to you, it is necessary to control your spending habits and realize that it will all go if not managed properly. You should follow the rule of ‘save first, spend later’. So, first, save a small portion of your money in a savings account and then spend money on the essential things like paying rent, bills, mortgage, insurance premiums, groceries, and others. This prevents overspending and helps you to stick to your budget. If you follow the steps mentioned in this article to manage your finances then you will have a strong financial foothold within a few years.
