It is not easy to learn how to manage your finances, and besides paying bills and other expenses, saving and investing, and the occasional purchase of something fancy, managing your money is not only for the high rollers; it’s a skill that everyone can learn.
Money management helps you to enjoy a comfortable lifestyle, be ready for unexpected situations and financial plans such as purchasing a house, setting up a business or early retirement. In this article, you will find out how to control your personal finances properly and create a strong financial foundation.
1. Check Your Financial Status Now
To optimally learn how to manage your finances and money, you need to have an idea of your current financial position.
Start by answering these questions:
What is your monthly income source? Salary, Investment, Freelancing etc.?
What is your total expenditure which includes rent, food bill and all the other utilities?
Have you been using any credit cards, have you been taking any loans?
How much money can you put in the bank every month?
Budget your income, expenses and your debts for one month at least. This information can be maintained using the budgeting apps such as Mint, YNAB or even through a simple excel document.
If you know where your money is going, you can adjust it and save money you do not need to spend.
2. Create a Realistic Budget on How to Manage Your Finances
Budgeting can be defined as the primary process of how to manage your finances. A budget works by dividing your income to cater for needs, savings and the way you want to live.
Follow the 50/30/20 Rule as a simple guideline:
50% of Income: Basic needs (shelter, food, and bills)
30% of Income: Desires (eating out, entertainment, shopping).
20% of Income: Savings and debt repayment
For example, if your monthly income is $1,500:
$750 for needs
$450 for wants
$300 for savings
Try and keep track of your expenses to check whether you’re living up to the budget. As time goes by you will be able to identify trends and some of the areas where you could cut your expenses.
3. Build an Emergency Fund
Accidents happen – sometimes one is not prepared for a medical bill, loss of a job or car breakdown to name but a few. That is why it is important to have an emergency fund.
How to Start an Emergency Fund:
- Try to build an emergency fund of up to 3-6 months of living expenses.
- Begin with a small amount taking up to 10% of your income every month.
- Put the money in a regular or high-yield savings account so it is easily accessible for spending yet the money earns some interest.
This means that a safety net will help to minimize stress since you avoid using credit cards or taking loans during emergencies.
4. Reduce and Eliminate Debt
Debt will take all your income and leave you with none to invest in your future and create wealth. High-interest debts like credit card balances or payday loans should be capitalized on by paying them off.
Two Effective Debt Repayment Strategies:
- The Snowball Method: It is recommended to pay off the small balances to get started then progress and pay off the bigger balances.
- The Avalanche Method: Pay more attention to the debts with high interest charges so that you can be able to save more money.
For instance, if you have $1,000 on your credit card that attracts an interest of 20%, you’ll save hundreds of dollars in interest if you pay it back as soon as possible.
Do not borrow more money by spending more than you have to and be very careful with your financial plans.
5. Set Financial Goals
Having goals with regards to the amount of money that you want to save gives your money direction. Even if you are planning to purchase a car or save for a dream vacation or even plan for early retirement, it is important to define what you want to achieve.
– Short-Term Goals (1 year):
The easiest saving goal is to set aside $1000 for emergencies.
Pay off credit card debt.
- Medium-Term Goals (1-5 years):
Build up money to buy a house.
Create a fund for higher education.
- Long-Term Goals (5+ years):
Retirement plan.
Invest and create financial assets in the form of wealth in one’s family.
Divide your goals into sub-goals and give yourself targets to achieve in between to help you get back on track in case you lose focus.
6. Monitor Your Credit Score
This score defines whether you are eligible for loans, mortgages, and even rental agreements. It makes a lot of financial sense because a good credit score will enable you to secure lower interest rates.
Tips to Maintain a Good Credit Score:
- Always make payments for bills and credit cards on time.
- Ideally, it’s best not to use more than 30% of your available credit.
- See your credit report and check it for inaccuracies often.
- You can freely check your score using Credit Karma or Experian, for instance.
7. You should review your finances more often.
Personal finance isn’t a one-time job; it is a continuous process that has to be checked and altered periodically. Take the time to look at your income, your expenses, how much you are saving and how you are doing with your goals at the end of each month.
Ask yourself:
- Did I stick to my budget?
- What areas can I improve?
- Is it possible to say that I am closer to my financial goals?
A fixed meeting schedule will keep you on your toes and help you make the right financial decisions.
Conclusion
Personal finance doesn’t have to be a complicated thing even though it can sometimes feel like it. When you evaluate your status, set up a budget, pay off your debts, and save money, you are in charge of your monetary life and are on the right track to creating a secure financial life.
Remember that little changes consistently, such as eliminating frivolous expenses or investing in good stocks, make major differences in the long run. Begin now and you will be on the way to having the money you want and the freedom from worry that you desire.
Ready to change your financial life? The time to start is now!
