The world runs on money and at some point in our life, we have all been worried about how to manage our money and plan for the future. However, despite the requirement, there is dearth of discussion on personal finance. Interestingly, personal finance remains a taboo topic amongst family and friends.
It’s high time we learn to save money by understanding personal finance.
The common understanding of finance is that it relates to company earnings and mega-merger. However, finance is all about an individual. The financial situation is the most important aspect of an individual’s life.
An individual can learn to control the money that flows in and out of his bank account and invest in schemes that will help grow the earning over a period of time.
Have a look at some of the suggestions that will help you make the necessary changes to meet your future financial goals.
1. Understanding and setting goals
The first step to determine your approach towards personal finance is to ask yourself what money means to you? Though some aspects may remain common to all, you must choose aspects that are really important to you.
For instance, everybody needs food, shelter, and clothing. However, where you wish to live, what type of clothes you wish to buy or how regularly you wish to eat out is completely an individual’s choice.
Prioritizing between a family vacation and college fees is a personal decision and the order of priority must be determined by you at the time of setting your financial goals.
Do remember that your financial journey begins only after you decide your real goal and vision so you have to be honest about what drives you.
2. Control spending
Most of us spend money without thinking much about it. To avoid doing so, you must perform a small exercise. You can prepare a list of everything that you spend on. It can include;
Phone bills, utility bills, rent, etc
Coffee or drinks or food bills with friends
Minor and major emergency bills
Again, your monthly expenditure can be split up into fixed and variable expenditures. Fixed expenditures include expenses that remain constant every month such as electricity, groceries, water, rent, food, and transport. Fixed expenses are important and you should allocate money every month to pay them off. In other words, these are referred to as necessities.
Variable expenses include things that are not purchased regularly. You can save a lot of money by cutting back on variable expenses as they are not necessities.
By comparing your fixed and variable expenses, you will have a fair idea of where to cut back on. The saved money can then be put away either in an investment scheme or towards clearing debt.
3. Make a financial plan
You will have to create and stick to a financial plan to achieve your financial goals. The plan must include how you spend and save your money.
By setting some money for the future and specific purpose, you will less likely make unnecessary purchases and fall off the track.
Try to maximize your savings early on. The more you save, the more money you will have to invest in a suitable scheme. The earlier you put your money into investments, the more money you will be able to accumulate over a period of time.
4. Finance Rules
When planning your personal finance, you will have to follow two basic rules;
Spend less: You cannot afford to save money if you are spending more than what you are earning. Therefore, it is important to spend less and invest the saved money in good investment schemes or put it away as an emergency fund.
Make your money work for you: The main objective of saving is to ensure you have a financial reserve to tap into whenever required. Investments will help you earn in the background while you go about doing your routine work.
5. Control debt
If you have to pay off debts with high interests, you may end up using your money to pay the charges, interest, and penalties. When all this is added up, it’s a significant amount of money that you could have put into your savings instead.
Reducing debt as much as possible and at the earliest is the most important aspect of personal finance. The best way to spend extra money is to save and pay off debts.
6. Create a long-term investment strategy
After paying off your debts and saving enough in your account, you will have to think of ways to invest that money.
The early on you start saving the greater growth potential you will provide for your money. Therefore, it is important to start investing early in life.
You can invest your money in mutual funds, stocks, bonds, purchase a property or start a business. However, do make sure to understand the pros and cons of each investment vehicle before investing your money in it.
For instance, if you plan to invest in mutual funds, you will have to know where the fund house invests in, who manages the fund, what the expense ratio is and what the exit load is if you take your money out of the scheme.
Managing your personal finance may not be as difficult as it seems. By spending less, saving more and investing in good schemes, you can generate sufficient money to meet your financial requirements. Follow the above steps or consult a renowned financial advisor and get your queries answered.