Managing personal finances can be overwhelming. Heck, there are whole professions dedicated to helping people understand their personal and family finances. But by following 5 simple rules, it can become much easier to not only get a handle on your money management, but to master it.
Learn how to budget
Creating a budget and sticking to it might be the most fundamental practice to master your finances, no matter what your situation. Think about it - even millionaires can lose it all if they don't balance their income with their spending. It's not glamorous, but it's effective.
A budget determines and tracks where your money goes over a certain period of time, usually monthly. Creating one can be a bit daunting, and maybe even a little disheartening if you're trying to cut back on your spending. And once it's set, sticking to it can be even harder. You don't have to go at it blind though. There are plenty of tools online to help you find the right system.
Master Your Credit Card Usage
You might think giving up your credit card all together is the best way to manage your money. But when used correctly, credit cards can be a really valuable tool to help you build or repair your credit. Especially if you have a credit card with rewards like cash back or travel miles, your credit card could actually help you improve your personal finances. All it takes is a little discipline (I know, easier said than done). The key is to never spend more than you have. Unexpected spends or anything outside of your budget should not be bought on credit.
Pay Yourself First
If your budget is tight or you're living paycheck to paycheck it can seem impossible to put money aside for savings, but it is still so important to do. Maybe it's once a month, maybe it's every paycheck, but you need to put money towards your savings before any non-essential spending. Now, which type of savings these funds go towards is up to you. Maybe it's an emergency fun, a rainy day fund, or retirement savings. These don't necessarily have to be savings that you keep tucked away forever. Maybe you're saving up for a big purchase like home renovations or a much needed vacation. Whatever it is, allocate a portion of your earnings to go towards savings.
Be Smart About Your Investments
There are tons of ways to invest your money, and each comes with its own level of risk. Some of the most common are stocks, owning your home, and saving for retirement. While investing should come secondary to the strategies discussed above, this is one way that you will actually build wealth outside of your usual income.
Investing in stocks might require a certain tolerance for risk. It's a good idea to talk to a financial adviser to help you asses the level of risk you can take on, how much you can contribute to your goal, and which investment vehicles are right for you.
Many people don't necessarily look at home ownership as an investment. But WOW, what a powerful investment it is. Now, short term home ownership can be risky - while home prices generally appreciate, there is no guarantee of that, and even less of a guarantee that it will happen in just a few short years. There is a lot to consider when owning your home, but when done correctly, home ownership can provide you with a lot of financial freedom in the long run. If you need help deciding whether this is a good investment option for you, I know a couple of people who can help you with that! ;)
Retirement savings are hugely important, and it's best to start investing in your retirement as soon as you can. Don't get me wrong, if you tried telling 20-something year old me to put money into aside for retirement, I probably would have outright ignored you. But man, think of how much even small investments would have compounded till today. There are number of retirement savings plans you can invest in, some independently, some provided through your employer.
Live Within Your Means
It seems like a given right? But we are so preoccupied with keeping up with the Joneses that we often try to buy stuff that we just cannot afford. In the end, you only hurt yourself. This is wear smart credit card usage especially comes into play. Living within your means becomes effortless if you're sticking to the principles above.
Following these principles might sound like you'll be stuck eating ramen in the dark just to save a few bucks. But it doesn't have to be. The point of following these principles is to achieve financial freedom. All it takes is a little discipline and foresight.
Original Article: "The Principles of Personal Financial Responsibility," posted by The Balance on 28 January 2019.