Financial independence is something we all want. But what we fail to understand is that it isn’t about just earning money. Managing your own money is an equally important factor towards financial independence. However, most of us are not pros at it, right?
Guilty as charged! It is a daunting task most of the time due to the sheer challenges of budgeting, saving, investing, and debt management. If you are someone who is looking to regain control of your finances, it is not an impossible task. In this article, we will help you learn how to manage your finances in a smart way!
1. Understanding Your Finances
You should establish what financial position you are currently in before you can effectively work on improving it. This starts with taking a look at your earnings, your spending, your liability, and your equity.
Assess Your Income And Expenses
To begin the process, one should track the amount of money they are earning and the amount of money they are spending. Document down all the ways that you earn income, be it wages, self-employment, a landlord, or any other income. Subsequently, divide your expenses into needs and wants, need-based expenses include rent, electricity, food, etc., and want-based including eating out, movies, Netflix, etc.
Analyze Your Spending Habits
Assess your patterns of spending. It is important to organize your data on income and expenditure. You might be surprised with how much you are spending on your wants. Maybe, it will be better if you can cut your expenditure in these areas.
Calculate Your Net Worth
Net worth is the amount which is obtained after deduction of liabilities from assets. It is a general health check of your financial status. This helps to determine one’s financial trend over a given period of time.
2. Setting Clear Financial Goals
Financial goals help you to guide your financial activity in the right direction. Your finance goals should be Specific, Measurable, Achievable, Relevant, and Time Bound (SMART). Here are some of the goals that you need to work on:
Short-Term Goals
These are objectives planned to be accomplished in the short run, that is, within the duration of one year. These include emergency fund, paying off a particular credit card, and saving for a vacation. These short-term victories help in creating momentum.
Medium-Term Goals
The intermediate goals range from one to five years. Some of the common ones include a house down payment, student loans payment, or starting up a business. These goals are tougher as they need more preparation and restraint.
Long-Term Goals
Strategic goals can take up to five years and above from today’s time. These could be saving for retirement, financing your kids college, or being financially secure in general. Future targets are the final objectives in the sphere of money and often need small and steady actions over many years.
3. Developing A Budget
A budget is a precise plan on how cash inflows should be utilized in meeting expenses, saving, and investing. In terms of finance, it plays a vital role in order to manage and improve one's financial competency.
Choose a Budgeting Method
Budgeting also comes in many types and each has its strengths. Some popular methods include:
Zero-Based Budgeting: Spend each dollar of the income on a particular expense or savings such that income – expenses = 0.
50/30/20 Rule: Split your income in the following proportions: 50% on necessities, 30% on the comforts of life while the remaining 20% on savings and clearance of debts.
Envelope System: Take a part of your paycheck for different kinds of expenses and use no more than the amount you decided.
Stick To Your Budget
Formulating a budget is relatively easy but implementing the budget is a whole different story. Make an effort to review your budget on the frequent basis and make necessary changes in it. Take advantage of budgeting applications or excel sheets to enable you to determine whether you are within the right budget.
4. Saving and Investing Wisely
Everybody must acknowledge the importance of saving and investment in wealth creation and fulfilling different financial objectives.
Build an Emergency Fund
An emergency fund is an amount of money kept aside in a separate saving account for emergencies such as hospital bills, change of car tires, illnesses, and others. Ideally, one should be able to build up an emergency fund equal to the amount of three to six months of living expenses.
Start Investing Early
Investing as young as possible ensures that you give the money as much time as possible to make some good returns. Open a retirement account, for instance, diversify your investments for stocks and bonds. If you are a beginner in investing, then you might need to seek advice from an expert in the area.
Employer Benefits
Your employer may be making provision for retirement benefits where you get to be matched based on the amount you choose to contribute to the plan and then maximize on it.
5. Managing and Eliminating Debt
A loan is one of the ways through which people get trapped in a cycle of debt. This can greatly hinder their chances of being financially free. Debt is an important factor and has to be well managed.
Prioritize High-Interest Debt
High-interest debts such as credit card balances should be addressed before the other kinds of costs. You can try the debt avalanche approach where each debt with the highest interest rate is paid or the debt snowball approach, starting from paying off the smallest ones.
Consolidate Debt
If you have several debts, you can consolidate them under a single loan with a lower interest rate as compared to each one of them. Consider things like personal loan or balance transfer credit cards.
Avoid Accumulating New Debt
As much as possible, remain credit inactive, especially whenever you are still in the process of eliminating your debts. Avoid expensive eating, drinking, travelling and other activities and ensure that you do not spend beyond your ability to pay.
6. Seeking Professional Advice
At times, it is good to consult a financial expert on such issues, especially when they are a bit technical.
Financial Advisors
A financial advisor will be able to provide real advice on your financial matters. They provide the services of creating a sound plan, investment, and guidance. Seek for a CFP who follows fiduciary standards in his or her practice to put the client’s interest as a priority.
Accountants
An accountant can assist in tax strategy, making sure that you are maximizing your tax shield. Budget and finance management can also be helped by them.
Legal Advisors
Generally, when it comes to handling finance issues such as estate planning, engaging in business ventures, and other legal issues, one must seek the services of a legal expert. They can assist with regard to legal issues as well as you can safeguard your business from being swindled.
Conclusion
Overcoming the challenges that come with managing your own money involves taking charge of your own money. If you have some goals for the future, try to define them, construct your budget, save and invest money, and live without owing too much money to credit organizations. Just do not forget that it is never too late to begin and each step that is taken towards accumulating financial knowledge is a step well taken.