Very few schools teach these fundamental skills of managing your money and keep your finances on right track, how you manage your income, saving and expenses can have a profound impact on your life.
You have been learning some basic maths while growing up, but most people out there lack the ability of basic financial management and budgeting. Skills like creating a budget, investing for future or most of all how credit card works are startlingly rare.
This guide is intended to serve as basic dose of financial discipline that will spare you and your family from future headaches and lay the foundation for good spending habits and sound financial principles.
The Basics of Personal Finance
Managing your finances is a number game, juggle well with numbers and you are on right track. The basic principle is same as 1+1=2, i.e. if you make X amount of money and your spending is Y amount of money, then it’s exigent that Y should be less than X.
However, there is much more to it apart from spending less than your income, your finances also get affected by your psychology, habits and the values you choose to live by. Or simply saying your mindset matter as much as the math does.
1- Spending < Earning : Spending more than you earn, will land you up in a spiral of debt that’s hard to walk away from. If you spend exactly as much as you earn every year, you’ll never be prepared for emergencies or major life changes.
Spending less than you earn allows you the freedom to save, to prepare for the future, and deal with the inevitable crises that life throws at you. The bigger the gap between your income and your spending, the better.
2- Future Planning : This doesn’t just mean retirement. When a store offers to let you pay off some gadget in 6 months with no interest, you need to know you can pay it off, or avoid that deal.
Establishing an emergency fund will allow you to deal with unexpected car repairs or medical bills. Having a retirement plan will ensure you have income when you’re unable to work anymore. Your finances should always look forward beyond the current month.
For E.g. Create a fund for unexpected expenses, once you’re debt free. A month’s salary is a good start and while it may take a while to build up, it’ll give you a real sense of security once you have it.
3- Circulate your Money : Don’t just sock all your cash in the vault of the bank, the rate of return in a bank is always less than the rate of borrowing from the bank, means your money will not be inflation adjusted and it will lose its value over time.
Circulate your money, invest in something of real value, like an asset or property, or gold or even start a business. Properly invested money earns more money over time, sometimes it’s not something tangible at times you have to invest in yourself like get some training to polish your skills.
4- Small Savings Matters : Invest some money each month for your financial goals, like saving for your retirement and your children’s education. This excludes your employer’s pension scheme or your own retirement investments.
5- Credit Card Dilemma : Paper currency is obsolete and has been taken over by plastic money, leaving you free from carrying cash, but this ease comes with a tendency to spend more and usually spending goes beyond control if you do not keep track of your spending. Beware !
Also, most people are unaware of the fact about how credit card works and how issuing bank makes money from consumers’ lack of knowledge about interest/charges calculation, this calculation may vary from bank to bank , but basic idea is simple bank will not lend you money for free, if you will not re-pay in stipulated time, you will pay charges.
The trickiest part is how the charges are calculated, it might be an addition to your knowledge that most banks calculate charges on the total billed amount for that period. For E.g if you owe $2000 to the bank, and you pay $1999, within that billing cycle, the bank will charge you for the whole $2000 again in the next billing cycle.
Also, “Minimum amount due” is only the interest of the total spending, it will not reduce your actual payable amount, so rule of thumb says if you keep on paying minimum due amount, you will pile up the interest with original payable amount unchanged.
Although financial circumstances vary from one individual to another, but the key factor is to be smart in your financial planning and keep adjusting your self with the factors which affect financial management, What your grandparents did may not work for you. There will always be newer, better tools to manage your money.
However, spending less than you earn will always be beneficial. Investing your money will always be better than doing nothing with it. And planning for the future will always be better than blowing your paycheck as soon as you get it.