7 tips to manage your personal finance effectively
Planning reduces anxiety and stress for an individual. Whether it is planning a trip in the near future, or children’s higher education after 10 years, planning in advance provides a roadmap, avoids distractions and manages detours if needed. All this is possible when the end goal is clear and realistic. Similarly, personal financial security is important to avoid difficulties in fulfilling financial obligations. For that security and peace of mind, it is imperative to manage personal finances effectively and efficiently. Managing personal finances is a life skill every individual irrespective of age and gender needs to master. Myfin.com has emerged as a credible web guide to handling all your personal finance needs in a streamlined manner.
Here we begin with a few steps to managing your personal finances more effectively.
- Be self-aware
The key here is to be honest to oneself and be aware of his/her financial realities of the current period and predict future responsibilities. It is important to keep a check on your expenses, debts and the income generated. One should be aware of the balance or imbalance between income and expenditure. An individual should also be able to identify areas of overindulgence. Mental mapping is not efficient and effective, written and editable text is highly recommended for this purpose.
- Budget yourself
Budgeting is to know your limits of financial expenditure. A well-known budgeting rule of thumb is 50-30-20 by US Senator Elizabeth Ann Warren. 50% of the income is set for the must-do necessities such as rents, debt pay-offs, education, food. 30% is for luxury spending, the desires such as luxury dinners, holiday trips. The 20% is for future savings. Although this division can vary according to personal needs and wants, it is a good start to align your finances and set out a road map.
- Financial Cushioning
Future is unpredictable. The job market, world economy, one’s own health may face challenges due to any reason such as pandemics, natural disasters, major accidents. Hence no job is secure enough to keep generating income forever. This can be a major cause of stress if an individual is not prepared for it financially. Financial cushioning, an emergency fund, is necessary to avoid such stress. Emergency fund that can cover at least 3 months of rent, food and all ultimate basics is essential. It is preferable to invest some amount, let it grow with time and redeem in case of emergency.
- Evaluate different options
Before making any financial commitment, weigh and evaluate all available options. This may include buying a house versus renting an apartment, buying credit card A with low fees or B with higher redemption value. For this, financial literacy is essential. It is important to make the right decision considering the present and future values. Buying a house right now may appear more costly but is more cost effective in the future as compared to renting an apartment. Make logical, data driven decisions.
- Invest wisely
Make smart investment decisions. Know the interest rates, money markets, stock markets, time value of money. All these play a key role in deciding where to invest. One important point is to diversify the investments. Do not put all your savings in one investment avenue. For example, invest in bonds such as government bonds, corporates bonds, but also invest in cryptocurrency and yet also in housing. Diversifying minimizes the risk of loss, if one investment is unable to generate profit, the other two most likely will cover up for that loss.
- Long-term planning; Retirement Plan
There is no denying that one day a salaried individual will not be earning a regular salary anymore. The savings come in handy at that time. From an early age, set aside a certain percentage of income for post-retirement living expenses. Buy health insurance, life insurance, invest wisely in bonds such as ETFs. This saving is extremely essential for a safe, financially stable post-retirement beginning.
- Evaluate and update regularly
Keep a check on your lifestyle. Be mindful of any overindulgence in material desires, spending more than you should. Check the income-expenses balance regularly and efficiently point out gaps that need to be addressed. Make adjustments to your 50-30-20 budget as per your need, not want. For example, after the age of 45 one might want to increase the 20% to 30% to prepare for post-retirement life. It is essential to monitor your finances to cap your expenditures and be foolproof of any financial mishap.
Managing personal finance may seem like a lot of work but once you layout a road map with clear end goals, it becomes easy to stay focused. A lot of softwares and applications are available to help you manage your finances efficiently and effectively. Plan-budget-invest-save-evaluate. It is a closed-loop cycle that has to be maintained orderly throughout life to avoid stress and unnecessary health deterioration.
