Many people put off getting their finances in order, but the sooner you begin the process, the better. Now is the time to create goals for your future financial security.
Managing your finances is the first step to creating wealth. And it doesn’t have to be complicated.
Everyone has a unique set of financial challenges. But there are some basic principles you can follow for smart financial planning.
Here are 7 personal finance basics to keep in mind.
1. Spend Less Than You Earn
The first step to financial management is spending less than you earn. It’s easy to fall into the habit of living beyond your means. But spending too much on a regular basis will get you in debt before you know it.
Try to look at your actual income and find ways to cut down on unnecessary expenses. If you spend less than you earn, you can start saving money for the future.
If you track your spending for a month, you can see much money you throw away on items or services you don’t need. Make it a goal to save as much as possible.
It’s always a good idea to try to earn extra money as well. Asking for a raise, changing jobs, or freelancing may be options to consider.
2. Plan Your Budget
You can’t be financially responsible without budgeting your money. No matter how much money you make, a budget is necessary.
A budget helps you see the money you actually make and allocate it towards paying bills, reducing debt, saving for retirement, and more. Having a budget in place helps prevent overspending and wondering where all your money went.
The 50/30/20 budget is a good framework to follow.
- 50% of your income is for living expenses, such as mortgage or rent, utilities, food, and transport.
- 30% is for lifestyle expenses, such as clothes, dining out, and entertainment.
- 20% is for saving for retirement, paying down debt, and emergencies.
If you feel like you can’t save 20% of your income, start small at first. Any amount you save is better than nothing.
3. Pay Yourself First
This may seem like an impossible task, but it’s so important. Paying yourself first means that every month or every time you get paid, you add something to your savings account.
Before you begin paying your bills or enjoying your paycheck, try to tuck away at least 10% of your take-home pay. In time, this practice really adds up.
You will have money saved away for your future or those unexpected expenses that always pop up. Allocating money each month for a larger goal will help keep you from spending too much or buying things you don’t need.
4. Be Responsible with Credit Cards
Credit cards are a valuable financial tool when you use them in a responsible way. They can help you build credit and help you improve your credit score.
This is important when you need to make a major purchase like a new home or car.
It’s easy to get credit cards, but it’s even easier to get into debt if you use them incorrectly. That’s why you need a plan when it comes to paying your credit card bills each month.
If you don’t pay your credit card bills on time, you can wreck your credit. If possible, you should only charge what you can pay for and pay off the full balance each month.
This saves you from paying the high interest rates that many credit companies charge. If you do find yourself with too much credit card debt, consider working with your creditors or getting a consolidation loan as a solution.
5. Build Your Credit
Your credit score matters. It can impact your everyday life in significant ways.
A low credit score can prevent you from borrowing money at a decent interest rate, buying a house or car, and even getting a job you want.
The good news is there are things you can do to improve your credit score. Paying all your bills, including your credit cards, on time will raise your score.
The goal is to show a pattern of responsible borrowing. So, try to pay your bills before the due date and don’t use all of your available credit.
6. Plan for Emergencies
Emergencies come along whether you’re ready for them or not. When you’re not prepared for the unexpected, it’s easy to get into debt trying to take care of the problem.
To be ready in case of an emergency, start saving each month for an emergency fund and make sure you have all the insurance coverage you need. Then, when extra expenses pop up, you won’t have to use your credit cards to cover them.
It’s a great idea to have three to six months of living expenses in your savings. That may sound impossible, but saving a little bit each month adds up over time.
Start by opening a high-interest savings account, and deposit whatever you can afford each month.
Don’t try to save money by skimping on insurance coverage. This can prove to be financially devastating when disaster strikes.
At a minimum, you should have health insurance, homeowner’s or renter’s insurance, and car insurance.
7. Invest in Your Retirement
You may be far away from retirement age, but it’s never too early to start planning for it. Although you can begin at any time, the earlier you start contributing to a retirement account, the better.
Take advantage of the tax breaks offered through Individual Retirement Accounts (IRA’s) and 401(k)s. Letting your money accumulate with compound interest is a smart way to build wealth.
You may feel like you can’t afford to save for retirement, but every dollar you put away helps. Once you get into the habit of saving each month, you’ll love watching your money grow.
Making smart investments to help your money grow faster. Before making any investments, it’s always a good idea to talk to a financial expert.
Personal Finance Basics
Saving and investing should become a regular habit, not just something you do once in a while. You don’t have to be a financial wizard to get your finances in order and plan for the future.
No matter how much money you make, following some personal finance basics can help keep you out of debt and on the right financial path.
If you are wanting to pay off your debts and improve your financial future, contact us today.