Managing your own finances is one of the most crucial skills you need to master to become a true adult. And managing finances isn’t just about carefully crafting your monthly budget. A proper approach to managing personal finances will not only save you money or pay off debt, but will also help you start investing responsibly or even move forward with estate planning.
Below, you’ll find our quick guide to managing personal finances that includes all the basic steps that will help you get your money in order. Besides budgeting and automating your savings, other financial planning strategies include creating an emergency fund, paying off student loans, and tracking your credit score. Keep reading to learn more about becoming financial literacy and manage your money wisely.
Establish a budget
It may sound complicated, but budgeting is the best way to control your spending and start saving money. All you have to do is make a plan, including how much you spend on essentials and how much you can afford to spend on non-essentials (like a gym membership, Netflix subscription or the money spent on Australian online casinos) to be able to set aside even a small sum on a regular basis.
You should start with the non-negotiable necessities, like rent or any medications you need. Then move on to other essentials. For example, your monthly food budget should include all grocery expenses (but dining out should be listed as non-essential), while your clothing budget should refer to necessary seasonal clothing or shoes, then items not necessary but desired.
You can set up a simple spreadsheet in Microsoft Excel or use online tools like Mint and YNAB. The latter aims to help you save for the future and reduce your wasteful spending habits. Try them out and combine their features with the insights 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 start building an emergency fund later. This will help you stay in control of your finances and always have 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. This 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’ll be saving money without even realizing 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, like paying off your student loans or saving for a vacation.
Repay student loans
Student loans are usually one of the biggest financial hurdles young people face after graduation. Depending on your situation, however, there are some things you can do to improve circumstances as you enter adulthood.
- If your budget allows, pay more than you need for your monthly student loan payments. This can be done by adding extra money to your monthly payment or rearranging your payment schedule so that you can pay off your loan in a shorter time frame.
- Focus on paying off the loan with the highest interest rate first.
- Ask for help if you feel overwhelmed with your student loan payments. Some establishments offer programs that allow you to reduce your monthly payment by extending the repayment period.
- Consider refinancing your student loans by applying for a private student loan or student loan consolidation. This option can be particularly useful if you want to reduce your monthly payments or extend the repayment period. Refinancing not only helps you save money on interest rates, but also makes it easier for you to manage your student loans with one lender.
Create an emergency fund
A emergency fund is an essential tool for anyone who wants to live below their means and prepare for the unexpected such as losing a job or incurring a large medical expense. Having an emergency fund will also save you from using high-interest credit cards as a source of funding when you find yourself in financial difficulty.
Here are some helpful tips to help you build an emergency fund:
- Save 10% of every paycheck towards savings. Make it automatic by depositing 10% of your earnings into your savings account a few days after payday.
- Make saving for emergencies part of your monthly budget. Financial experts recommend keeping enough money in an emergency fund to cover three to six months of living expenses.
- Set aside money for savings, emergencies and retirement as soon as possible. Don’t wait until you’re done with student loans, paying off debt, or other obligations before setting aside money for your future.
Monitor your credit score
Credit scores play a crucial role in your ability to apply for a loan or a credit card, buy a car or a house, and even rent an apartment or get hired for a job. In fact, most landlords often perform credit checks on potential tenants to assess their creditworthiness.
Monitoring your credit is the only way to ensure that the information on your credit report is correct and that your credit score remains high. Some of the factors that affect your credit score include:
- payment history – late payments, missed payments, and unpaid bills typically lower your credit score,
- amounts owed – the less you owe, the better your score,
- length of credit history – a limited credit history will lower your score,
- new credit – opening new credit accounts can 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 about your credit can lower your score.
You can stay on top of your FICO score by checking it regularly 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, provide financial security for your family, and avoid unnecessary taxes or excessive payments for services after your death.
Here are some basic steps that should help you create an estate plan:
- Make a list of all the assets you currently own. This should include everything from real estate (house, apartment, land) and other assets (cars, boats, jewelry), investments (stocks, bonds) and life insurance policies. Make sure this listing includes all the details, such as location, value, and ownership.
- Choose a will writing service that meets all of your state’s legal requirements and create a will that includes instructions on how you want to distribute your estate after your death.
- Choose a power of attorney that allows your loved ones to take care of financial affairs while you are alive and take care of all legal matters after your death.
- Talk to a financial planner about creating a financial plan for your retirement. Consider investing in retirement plans like 401(k) accounts or Roth IRAs to ensure stable income in old age.
- Make sure you’re on the right track with your retirement plan by comparing it with others in similar situations or by seeking advice from a qualified financial planner.
The main purpose of estate planning is not only to protect assets from being wasted by beneficiaries, but also to ensure that the right amount is passed on to beneficiaries without incurring taxes or additional charges for services.
As you can see, there are many ways to stay in control of your finances and start building wealth while avoiding common mistakes people make when dealing with money management issues. The key is to set a reasonable budget and stick to it each month, find ways to automate savings and pay down debt, maintain good credit scores, and create an estate plan for your family. and your loved ones if necessary.
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 start building wealth today!
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