Tips To Manage Your Finances Smartly
by Arina Smith Financial Planning 24 April 2020
Many people assume that earning less income is the foremost reason behind their poor financial standing. True, the paycheck has a huge say to determine an individual’s lifestyle. But the way you manage your finances also plays a critical role, and simply a spike in the salary will barely aid you in meeting the long-term financial goals.
Our society is full of such people who had a truckload of bank balance at one point. Though, the capital didn’t last, owing to their poor money management skills. In this day and age, being in control of your finances is more important than ever. Because this is the era of a globalized economy where a minor instability on the international horizon can be lethal for you.
Money management is not as sophisticated as it may sound. So let’s dive into the tips that will help you to master this art:
Tips To Manage Your Finances Smartly
1. Map out a budget
Mapping out a budget is the best way to keep financial pitfalls at a safe distance. Financial experts advocate that stepping into a brand-new month without making the blueprint of the budget is like driving a car without having a roadmap by your side. While you may eventually reach the desired location, burning unnecessary fuel will be inevitable.
Being a first-timer, the process of budgeting could be a tough nut to crack. The following step by step techniques can save the day for you:
- First thing first: jot down all of your income. Since the whole point of making a budget is to give you clarity of thought, you can’t enlist earnings that you may or may not get at the end of the month.
- Next up, come to terms with stuff like traveling costs, living costs, household bills, insurance, mortgage, property investment, etc.
- Lastly, calculate the total amount of your income and expenses. If the expenses are less than the income, you have done a decent job. If not, revisit the second step and exclude the luxurious items from the list.
Don’t throw this vital piece of information away as soon as the month ends. It will prove to be a priceless commodity to transform you into a better financial planner.
2. Pay off debt
According to a well-documented finding, a whopping 80 percent of the Americans are under debt in one way or the other. Considering these numbers, there is a great chance that you may also be liable to pay money to someone. The debt entitles you for reasonable interest and makes saving next to impossible. That is why getting rid of the debt at the earliest is a core feature of financial management.
There are multiple ways to craft a suitable debt elimination strategy. For example, if you have only one loan on your credit, reserve the biggest chunk of income for the debt payment. Repeat this process every month, and you shall be debt-free rather quickly.
In the case of multiple loans, debt avalanche is typically regarded as the best strategy. The method enables you to make minimum installments on all the debt sources while giving the highest priority to the loan with the maximum interest cap. Once all the debt has been cleared, stay away from borrowing as much as you can.
3. Refrain from unnecessary expenses
At first, glance,sipping an extra cup of coffee does not seem to be too much burden on the pocket. But it does come into play in the long run. Let’s say you spend 5 dollars regularly on the stuff that does not have anything to do with your daily requirements. Gradually,that amount will pile up to 1825 dollars annually.
If you subscribe to a similar attitude, it is about the time to let go of it. Though things won’t change overnight, the impact will be visible as the time progresses.
4. Build up an emergency fund
Sometimes life can take unexpected turns and twists. Things like meeting an accident, losing a job, and getting sick, don’t come up with an invitation. You just always have to be on your toes to nib them in the bud. That’s where the emergency fund will provide you a much-needed cushion. As a rule of thumb, one must have enough finances in the emergency pot to see off six months at a minimum.
How much one manages to put into the emergency finances varies from person to person. However, experts of the opinion, 10 percent of your total income is considered as a minimum threshold. Instead of keeping money in the locker, go for a bank account. This does not only put your capital in safe hands, but you will also receive interest.
The final verdict
Bad money management leads to severe repercussions. So much so, sometimes things come to a pass where recovery takes years. But the good news is that you can easily do away with these problems by sticking to the ideas mentioned above.