Managing your finances is a skill that you need to learn to become financially stable in your life. Even rich people lose their money due to a lack of proper money management. According to research done by National Endowment for Financial Education, it was found that about 70% of lottery winners lose all their money in a few years. That’s because they indulge themselves in careless spending. You must keep tabs on your earnings and spending to manage your money better.
Importance Of Managing Money
No matter how rich or young you are you need to learn how to manage your money at an early stage. Good money management is necessary to save and grow your money. Once you start keeping track of your expenses vs. earnings you will understand the true value of money. This knowledge is important; otherwise, you will keep spending on unnecessary things and waste all your money. You cannot guarantee that your financial situation will be the same forever. By managing your money properly you can prepare for emergencies and unforeseen events. During the recent pandemic, many people lost their jobs. Those who managed their money well could survive even in such bad conditions. This kind of situation can appear again so you need to be financially prepared.
You can organize your savings when you start managing your money. There are various online money management apps that you can use. You can set clear financial goals once you start managing your money. You won’t have trouble fulfilling your dreams like going on holiday, or buying a car or house if you know how to manage your finances properly. You shouldn’t let your money sit idle; instead, invest it so that it can grow over time. You can open up a business, invest in a real-estate business, or choose short-term investment schemes like fixed deposits, mutual funds, and others. Investment is an essential part of money management.
How To Manage Finances Better
You can achieve financial freedom by taking care of your finances. Money management is a life skill that everyone must learn. It will help you to survive through the tough times and fulfill your goals in life. Here are some tips to manage finances better.
Set Financial Goals
You must set your financial goals like buying a house or car and saving up for your kids’ college or retirement. You can start contributing to your retirement fund at an early stage. That way you will have more money when you retire. You should create a separate savings account to save up for your house, car, or kids’ college.
Create An Emergency Fund
You should set aside a small portion of your income every month to create an emergency fund. You must target an amount equal to three to six months of your living expenses. The recent pandemic should be a lesson for all. Many people lost their jobs and fell ill. They went through an extreme financial crisis. An emergency fund is necessary to survive these unpredictable events in life. You can deposit your emergency fund in a high-yielding savings account for better returns.
Make A Budget And Stick To It
Creating a budget prevents any unnecessary spending. It’s a habit that you have to adopt to save money. You should stick to your budget every month to manage your finances. You can use various methods to create a budget including:
⦿ Zero-Based: Use all the money for expenses, debt payments, and savings goals so that no extra money is left.
⦿ 50/30/20: Allocate 50% of income for necessary expenses, 30% for other spending, and 20% for savings.
⦿ 80/20: Keep 20% of income for savings and the rest for expenses.
⦿ Envelope Method: Have an envelope for keeping money for each expense, like groceries, bills, rent, and others. Put a fixed amount of money according to your budget inside each envelope and stick to the budget.
You should make sure that your spending is less than your income always. You will have to reassess your budget from time to time. This is because your income may increase, prices of commodities may increase, and government tax rules may change. So, you need to consider these changing situations when setting up a budget. To develop a realistic budget you should accumulate all your previous bills and notice the pattern to guess the amount of money spent every month on bills. Prioritize your spending and don’t spend more than your income. Many people think budgeting means you have to sacrifice your little joys like going to a restaurant or cinema. But in the long run, it can bring you great happiness. You can use different budgeting apps available to create a budget.
Pay Off Credit Cards And Debts
Make it a habit not to use the credit card to purchase things that you can’t afford at the moment. If you have having outstanding balance on your credit cards then pay them off. You can get a balance transfer credit card to get 0% APR to pay off your credit card balances. Sometimes, you need to keep the credit card active to keep the account open. In that case, make sure you pay back the amount due before incurring any interest. For debt repayment, you can use one of two strategies: the debt avalanche method and the debt snowball method. In the debt avalanche method, you pay off the high-interest debts first. In the debt snowball method, you pay off the smaller amounts first; this will reduce your accounts and simplify financial management. Alternatively, you can consolidate your debt by taking a low-interest personal loan. By getting out of debt you can be free from financial burden.
If you have lots of accounts then it may be difficult to manage them. So, consolidate the various accounts and maintain a single one to make money management easier. There will be less error and mismanagement. You will not have issues like paying fees on duplicate accounts or losing track of an account.
You should start investing from your first income to get a higher return. This will give you the advantage of compounding and your money will increase exponentially. You can also invest in high-return and high-risk ventures when you are young. As you grow old, you should move towards low-risk investment options. Keep in mind the effect of inflation on investments. The value of capital reduces over time, so make sure your funds grow more than inflation. You should keep track of your portfolio continuously. Make sure that you invest in good-performing assets.
Monitor Credit Report
A credit report is very important for getting a mortgage for a home and other loans to fulfill life’s milestones. Your credit score should be good all the time. It tells about your financial health to the lender; they feel assured that you will be able to pay back the loan on time. So, you should monitor it closely to spot any discrepancies in payments and take measures to correct them. Pay bills on time and don’t default on paying the credit amounts to maintain a good credit score.
Plan Your Taxes
To avoid unwanted tax deductions you should plan for your taxes. Keep track of the rebates and tax exemptions; that way you will save a lot of money. Tax planning can help you avoid penalties. Here are some ways to maximize your savings.
🏦 Make Use Of Tax Deductions: You can claim various deductions to reduce the taxable income which includes investments in tax-saving mutual funds, life insurance premiums, and others.
🏦 Plan Retirement Contributions: Various retirement contributions help to accumulate wealth and reduce tax liability. In many retirement schemes, the money you withdraw at the time of retirement will be tax-free.
🏦 File Tax Returns: You can avoid interest charges and penalties by filing the tax returns within the specified time.
🏦 Hire A Tax Professional: A tax professional can plan your taxes properly and show you ways to save money and avoid tax penalties.
Medical expenses are very high and as you age you will need funds to take care of your medical needs. So, start a health insurance plan early. You can also consider taking life insurance to protect your family from financial crises when you are gone. You can also consider taking car insurance to protect yourself financially in case of an accident. Car insurance can pay for your medical expenses, car damage, and legal fees in case of an accident and help save a lot of money.
Plan For Retirement
It is a fact that you can’t keep working throughout your life. Therefore, you should plan for your retirement and you should start early. You never know you may have to retire before the normal retirement age for health or other issues. Starting your retirement fund early keeps you financially secure after retirement. Start by investing small amounts and develop a substantial amount in 10 to 15 years. You can take up retirement plans, for example:
⚫ 401(k) Plan: You deposit pre-tax money from your salary to a retirement savings plan; that means you won’t have to pay tax for this money. Here the employer also contributes.
⚫ Individual Retirement Account (IRA): It is a self-sponsored account and it will be taxed.
⚫ Roth IRA: It offers tax-free withdrawal of money when you retire.
⚫ SEP IRA: It is a great option for those who are self-employed.
Increase Your Earnings
You should try to increase your earnings by asking for a raise or looking for a better-paid job. You can take up a part-time job or freelancing besides your day job for better financial security. If you have a car you can drive for Uber, for example. You can also start blogging, become a virtual assistant, or explore other online jobs. You may also start a small business from home.
You should try to reduce your monthly expenditures. Impulse buying habits can unnecessarily increase your expenses; so, try to avoid those. You can reduce food expenses by eating at home most of the time, shopping for groceries when there are discounts and offers, reducing usage of electricity and gas to lower energy bills, limiting various subscriptions, and more.
You must have a checklist of all your monthly expenditures and maintain your lifestyle according to the budget you have created. You can set up reminders on your phone to pay bills and other payments every month. Avoiding impulse buying and expensive purchases can save a lot of money. If your money management situation becomes too complicated, you can hire a financial expert to handle your finances.