Learning how to manage personal finances effectively is one of the most important skills that you should develop in modern-day life. Without proper personal money management, you could find yourself spending your entire life working for money but never really getting ahead. Good personal finance planning lets you make the most of your income and savings, helping you live a happy and financially-secure life.
However, in order to truly excel in your personal finance management, quite a bit of effort and dedication is required. In this article, the Head of Finance at LoanMe – Pubudu Karunarathna – shares a few useful tips on how to manage your finances effectively and reap the benefits of a financially-successful life.
1) Have a Budget…& Make Sure You Stick to It!
You can begin by deciding on a monthly budget for yourself, so that you have a spending plan and a clearly-defined goal that you can work towards achieving. Make sure that your budget is realistic and isn’t overly restrictive on your lifestyle and spending habits. A good way of doing this is by sticking to the 50-30-20 rule – which segregates your planned expenses into 50% for essentials, 30% for non-essential expenses and 20% for savings.
2) Keep a Detailed Track of Your Expenses
Once you have a budget created for yourself, you now need make sure your expenses align with it. The only way to do this is by maintaining a detailed record of your expenses – in order to track your progress. In addition to measuring progress, tracking your expenses helps you identify and spot any wasteful spending habits so that you can maintain control of your finances and promote better spending habits. Downloading an expense tracking app can be a good idea as it is extremely convenient – letting you make updates on-the-go – and can also provide useful insights into your expenditure.
3) Expand Your Financial Knowledge
Increasing your financial literacy helps you be better-prepared with the skills needed to manage money and ensures that you make well-informed financial decisions in your life. Most people who do not have a basic understanding of finances find themselves vulnerable to bad money habits. You can start by reading articles, books and other resources on financial topics. If you feel that you need to expand your knowledge even further, you can enroll yourself in a financial literacy course and also start learning to use financial management tools.
4) Prioritise Paying Off Any Debt
Paying debt off quickly is important since being debt-free lets you focus on your savings as well as other financial goals. Whether it’s a loan, your credit card bills or any form of money that you owe someone – make sure you give priority to debt payments in your budget and work towards eliminating it as soon as possible. Getting rid of debt also lifts a massive mental burden since it offers financial freedom in your life.
5) Use Credit Cards Wisely
Credit cards are rather risky instruments for those with bad spending habits. Studies have shown that people are significantly more likely to spend more when paying with credit cards, as opposed to paying with cash. One reason for this is attributed to the psychological factor that spending future money is less painful than spending present money. Credit cards also allow you to spend money that you do not actually have in hand, which increases the chances of you spending more. As such, it is extremely important to be aware of your credit card expenses and always try to keep them to a minimum as much as possible.
6) Save a Fixed Sum Every Month
The importance of saving up cannot be stressed enough and allocating a separate amount for savings should be a crucial component of your monthly budget. Though this is the most basic financial advice out there, most people tend to struggle greatly when it comes to saving. One reason for this is due to a “present-bias”, which makes people feel the need to focus their attention on their immediate needs over needs that may emerge in the future. However, it is extremely important to be mindful about saving as it is the foundation of a financially-secure life.
7) Automate Your Savings and Essential Payments
Automating your finances means that you set up your bill payments and savings accounts to be paid each month via automatic deductions from your bank account. This ensures that your essential payments utility bills are paid on time, without your involvement. It is also extremely useful in helping you build your savings by treating your savings deposits as another monthly expense – thereby forcing you to save.
8) Get Rid of Unnecessary Expenses
Once you start tracking your expenses, you need to analyze where most of your money is being spent. Have a careful look at any hidden expenses that you can eliminate, such as monthly subscriptions. Cancelling unnecessary subscriptions such as streaming services and mobile apps lets you hold onto more money each month, enabling you to save more.
9) Consider Additional Sources of Income
It might also be a good idea to think about the possibility of having extra streams of income.Your income does not have to depend entirely on your earned salary; other sources can include income from interest, dividend income or even income from a part-time business. Having multiple streams not only accelerates your journey to achieving your financial goals, it also helps you plan for your future targets in a more organised manner.
10) Planning is Important, But Make Sure You Start!
Last but not least – get started. Waiting for the perfect moment to start saving will not work and will only hinder your progress. Even if it’s in the smallest of ways, do something and do it now. You could have the perfect money management plan, but it is of no use if you do not execute it. The best time to start is always now, to begin working on something that will make a massive impact on your life.