Personal finance includes budgeting, short- and long-term goal setting, spending, saving, and investing. It's about achieving your personal financial goals, whether it's having sufficient short-term financial needs, planning for your retirement or saving for the nice education of your children.
It comes down to understanding your income, expenses, lifestyle, financial goals and coming up with a plan to meet those needs within your financial resources. Being financially literate is also crucial. It helps you distinguish between good and bad advice and make smart financial decisions.
Do you keep track of your finances?
Let's take a closer look at how to manage your money well with these seven money management tips.
Take stock of your current financial situation
First of all, you need to have an overview of your current financial situation. Take stock of your financial position. Make a list of your outstanding debts, loans and monthly obligations.
Are you earning enough to pay off those obligations? Is it better that you cut back on some expenses to make it all more bearable and manageable?
We also recommend checking your credit score to find out if you are already in a good credit position. Use a credit scoring service or (sometimes) free credit scoring site available in your country to access the report.
Once insightful, you can start using a monthly budget to help you with your monthly expenses.
Set a monthly budget
Planning is how you get ahead with life and money too. There is a saying that goes, “If you fail to plan, you plan to fail.” Of course, don't let this become the description of your financial journey.
Set your budget every month before the month starts. It helps you ensure that you can carry your daily expenses on top of your monthly obligations, while also allowing you to set aside some emergency funds with savings.
There are several ways to tackle this. Writing down the budget in a notebook is the traditional way. You can also use a Google Sheets document, download a money management app, or even use the Notes feature on your phone.
Not sure where to start budgeting? Then use the following 50/30/20 rule.
Follow the 50/30/20 rule in personal finance
Have you ever heard of the 50/30/20 rule? It's a simple money rule to help you manage your budget effectively. Set 50% of your net income for essential needs, 30% for wishes and the remaining 20% for savings.
50% for Necessary Needs
Needs are those bills you have to pay and other things you need to survive. These include your rent or mortgage payment, car loan, groceries, takaful (a protection plan), phone bills, utilities, and other must-haves.
If your needs are more than 50% of your net income, you might want to consider making some lifestyle changes. Think of moving to a smaller house, opting for a cheaper car, a more affordable telephone subscription and a less expensive store to do your shopping.
30% for wishes
Wishes are everything else that is actually not essential. They include fancy dinners, Netflix subscriptions, branded perfumes, the latest gadgets, you name it. These are things that make your life more comfortable and enjoyable, but not necessarily richer or happier by definition.
You may want to consider cutting back on some of your needs if you've been spending extravagantly and too much. Make sure that the amount you reserve purely for your wishes (and not necessary needs) does not exceed 30% of your net income.
20% for saving
Set aside 20% of your net income for savings. The goal is to have at least three to six months of your net income in reserve for emergencies. Having a more than sufficient emergency fund, especially in an uncertain time like during this one COVID-19 pandemic, is vital. It helps to be financially prepared for whatever may come your way.
Once you've saved enough, you can start growing your money by investing it.
Track your expenses
Managing your money well includes keeping track of your expenses. Your budgeting will go down if you don't watch yours. You need to know where your hard-earned money is going and make sure it's in line with your budget by keeping track of it.
Track your expenses throughout the month, not just at the end of the month. Better yet, write it down every time you spend money – even the smallest amounts. That way you won't miss a single expense and you get a broader picture of your expenses versus budget.
Spend money within your means
Earlier we wrote about 7 important reasons to stay within your financial means to live. You would do well to spend moderately, not too frugally but certainly not too generously.
As long as you spend money within your financial means, you will face an ever-expanding financial future. Spending within your means prevents you from wasting money trying to impress others or keep track of others' wealth.
Falling into the trap of watching others and their spending habits is a surefire way to thin your wallet. You gain nothing but a too thin wallet.
Pay off your credit card(s) immediately
There are pros and cons to having a credit card. On the one hand, extra rewards, cashback and discounts can be attractive and beneficial to you. On the other hand, credit cards can be a disaster if you haven't learned how to use them wisely.
Getting credit card debt is the last thing you want. Once things get out of hand, you often pay a nice sum in interest for a long period of time due to late payment and often higher than what you actually spent with your credit card.
The trick is to only use a credit card when necessary and immediately pay the outstanding amount before it starts to cost you extra interest. Also limit the number of credit cards as much as possible, because in principle one should suffice, right?
Start investing as early as possible
The sooner you get your finances in order, the sooner you can start investing your money.
It takes time to grow your money. So the sooner you start investing, the greater the accumulated return on your investment and the more money you make.
There are several investment options that you can consider. Research to find the one that best suits your finances and financial goals. Find out if the minimum investment is one-time or recurring and how long you need to commit before you can reap the benefits.
When it comes to investing, it's best to diversify. Don't put all your eggs in one basket. Risk spreading remains extremely important!
When you manage your money well, you have more time to focus on other things in life that money can't buy 😉
Sources ao Ethis (link), FSCB (link), Investopedia (link), Manulife (link)
