Handling your own finances is one of the most crucial skills you need to master to become a real adult. And finance management isn’t just about thoughtfully setting up your monthly budget. A proper approach to personal finance management will allow you not only to save money or pay off your debts but will also help you start investing responsibly or even get ahead with estate planning.
Below, you will find our brief guide to personal finance management which includes all the basic steps that will help you put your money in order. Apart from developing a budget and automating your savings, other financial planning strategies include creating an emergency fund, paying off student loans, and monitoring your credit score. Continue reading to learn more about becoming financially literate and managing your money wisely.
Set Up a Budget
It may sound complicated, but setting up a budget is the best way to control your expenses and start saving money. All you need to do is make a plan, including how much you spend on essentials and can afford to spend on non-essentials (such as gym membership, Netflix subscription, or money spent on Australian online casinos) to be able to regularly set aside even a small sum.
You should start with the non-negotiable necessities, such as rent or your required medications. Then, move on to other essentials. For example, your monthly food budget should include all the grocery shopping expenses (but eating out should be listed as non-essential), while your clothing budget refers to the necessary seasonal clothes or shoes and then not-so-necessary but desired pieces.
You can set up a simple spreadsheet in Microsoft Excel or use online tools like Mint and YNAB. The latter focuses on helping you save for the future and cut down on unnecessary spending habits. Try them out and combine their features with the knowledge from our budgeting guide to get the most out of them.
Automate Your Savings
Once you have a clear idea of how much money you can spend on a regular basis, it’s time to automate your savings to later start building an emergency fund. This will help you stay in control of your finances and always have some money for urgent expenses or emergencies.
For example, you can set up a savings account with automatic transfers from your regular account, ideally a few days after payday. That way, you won’t be tempted to spend your money in the meantime, and you’ll learn the discipline of saving for the future. You will save money without even noticing it and will soon have enough funds for a rainy day. The good news is that you can use the same approach with other financial goals, such as paying down your student loans or saving for a vacation.
Pay Off Student Loans
Student loans are usually one of the biggest financial obstacles that young people face after graduation. Depending on your situation, though, there are some things you can do to improve the circumstances as you enter adulthood.
- If your budget allows it, pay more than required toward your monthly student loan payments. This can be done by adding extra money to your monthly payment or rearranging your payment schedule in a way that allows you to pay off your loan in a shorter period of time.
- Focus on paying off the loan with the highest interest rate first.
- Seek help if you feel overwhelmed by student loan payments. Some institutions offer programs that allow you to reduce your monthly payment by extending the term of repayment.
- Consider refinancing student loans by applying for a private student loan or a student loan consolidation. This option can be especially helpful if you want to lower your monthly payments or extend the repayment period. Refinancing not only helps you save some money on interest rates but also makes it easier for you to manage your student loans from one lender.
Build an Emergency Fund
An emergency fund is an essential tool for anyone who wants to live below their means and prepare for unforeseen events such as losing a job or incurring a major medical expense. Having an emergency fund will also allow you to avoid using high-interest credit cards as a source of financing when you find yourself in financial trouble.
Here are some useful tips to help you build an emergency fund:
- Save 10% of each paycheck towards savings. Make it automatic by paying 10% of your income into your savings account a few days after payday.
- Make saving for emergencies a part of your monthly budget. Financial experts recommend keeping enough cash in an emergency fund to cover three to six months’ worth of living expenses.
- Set aside money for savings, emergencies, and retirement as soon as possible. Don’t wait until you are done with student loans, debt payments, or other obligations before putting money aside for your future.
Monitor Your Credit Score
Credit scores play a crucial role in your ability to apply for a loan or credit card, buy a car or house, and even rent an apartment or get hired for a job. In fact, most landlords often run credit checks on potential tenants to evaluate their creditworthiness
Monitoring your credit is the only way to make sure that the information on your credit report is correct and your credit score remains high. Some of the factors that affect your credit score include:
- payment history – late payments, missed payments, and unpaid bills usually lower your credit score,
- amounts owed – the less you owe, the better your score,
- length of credit history – limited credit history will lower your score,
- new credit – opening new credit accounts may lower your credit score,
- types of credit used – using only one type of credit (e.g., only credit cards) can negatively affect your score,
- inquiries – too many inquiries into your credit can lower your score.
You can stay on top of your FICO score by regularly checking it using Discover’s Credit Scorecard or MyFICO.
Create an Estate Plan
Estate planning is one of the most important financial planning strategies that allow you to prepare for retirement, ensure financial security for your family, and avoid unnecessary taxes or overpaying for services after you pass away.
Here are some basic steps that should help you create an estate plan:
- Make a list of all assets you currently own. This should include everything from real estate (house, apartment, land) and other property (cars, boats, jewelry), investments (stocks, bonds), and life insurance policies. Make sure that this list includes all details, such as location, value, and ownership.
- Choose a will-writing service that meets all legal requirements in your state and create a will that includes instructions on how you want to distribute your wealth after passing away.
- Choose a power of attorney that allows your loved ones to handle financial matters while you are alive and take care of any legal matters after you pass away.
- Talk to a financial planner about creating a financial plan for your retirement. Consider investing in retirement plans like 401(k) or Roth IRA accounts to ensure stable income during old age.
- Make sure that you are on track with your retirement plan by comparing it with others in similar situations or by seeking professional advice from a qualified financial planner.
The main goal of estate planning is not only to protect assets from being squandered by beneficiaries but also to ensure that the right amount is passed onto beneficiaries without incurring extra taxes or fees for services.
As you can see, there are plenty of ways to stay on top of your finances and start building wealth while avoiding common mistakes that people make while dealing with money management issues. The key is to set up a reasonable budget and stick to it every month, find ways to automate savings and pay off debts, maintain good credit scores, and create an estate plan for your family and loved ones if needed.
Remember that money management issues are normal and will happen to everyone at some point in their lives. The trick is to find ways to make money management mistakes a thing of the past and to start building wealth today!
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