Wednesday, 25 January 2017

How To Manage Your Money - A Beginner’s Guide (Part 1)

How you manage, spend, and invest your money has a profound impact on your life, yet most of us reach adulthood without ever being taught basic money management.  It can feel like a lot of paperwork and numbers, but it is just as much about psychology, habits, and the values you choose to live by. So your mindset matters just as much as the math, and the fundamentals should never, ever change.
Here are a few simple rules that will help improve your financial life:
  • Spend less money than you earn: Spend more than you earn, you’ll end up in a spiral of debt that’s hard to recover from. Spend exactly what you earn, and you’ll never be prepared for major life changes. Spending less than you earn allows you the freedom to save, and prepare for the future.  The bigger the gap between your income and spending the better.
  • Plan for the future: Try to pay bills ahead of schedule.  Hold an emergency fund that allows you to deal with unexpected car repairs or medical bills. Have a  solid retirement plan to maintain income when you’re unable to work anymore. Finances should always look beyond the current month.
  • Make your money make money: Money can grow while you sleep, provided you actually save some. Properly invested money grows over time, so invest in things that will earn you more money than you had before. Sometimes that’s an investment account, starting a business, or improving your education to get a promotion.
It is vital to know where your money goes, rather than it just disappearing from your account.  A budget—even a basic one - is probably the best way to make sure you’re spending less than you earn, and starting early is important. A habit of categorizing bills & tracking expenses will help prevent financial problems before they start.
Calculate what you make each month, then write down all of your regular expenses. This includes recurring costs like your rent or mortgage, utilities, car payments, etc. For more variable costs, you may need to track what you spend over time.  Monitor all expenses for a month or two, adding up everything to see how much you’re spending.  Ideally, the amount spent each month should be lower than the amount you earn.   If not, carefully examine your list and see which expenses can be reduced. For some, this could be as easy as cutting luxury items, for others, hard decisions may have to be made.
Once set up, a web based service like Mint can even manage it for you.  Connect your bank account and it will automatically tag transactions, so you can track spending on bills, groceries, and shopping.  You can also use it to set budgets for individual categories and notifications if you go over.
Once you make a habit of tracking your spending, it’s time to establish a budget. Approaches may vary for different people, with some opting to allocate amounts into specific life categories:
  • Fixed costs (50-60%): This should include every cost that you know is coming each month, - rent, gas, groceries,  cellphone bill, and anything else that generally stays the same. These are core expenses essential for day-to-day living.
  • Investments (10%): As you build savings you’ll eventually want to invest some money so it grows over time. If you have any investments like a company pension that come out of your salary, count them here.
  • Savings (5-10%): Shorter-term savings go in this category - saving up for holidays, gifts, or large purchases like a new TV. Also include cash for an emergency fund here, a liquid amount for unexpected emergencies or bills.
  • Guilt-free spending (20-35%): For the finer things in life. Dining out, drinking, or splurging on entertainment or luxury goods. As long as you have the other three categories covered you can spend this money without feeling guilty about your budget.
Ultimately, budgeting means knowing where your money is going and planning ahead. If you don’t want to go to the trouble of writing down every penny you spend, this model will still cover most of what you need to budget for. The only thing you need to decide is how much to place in each category.

The suggested percentage allocations should be adjusted based on your age, financial goals, and what is most important to you at any given phase of life.  Remember, the more you save now,  the more money you’ll have to buy a house, retire early, or achieve other goals later in life.

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