Managing personal finance begins with the proper understanding of money. Money is just a tool to achieve what we ask of it. For some, money is negative at best and evil at worst. For some, money is good. But money is actually neutral. People just need to be taught how to use money effectively.
Most Americans live from one paycheck to another. When all things are going right, this strategy might work well. But when unexpected things happen, living from paycheck to paycheck is the beginning of huge financial distress.
So, how do we manage our personal finances well? Here’s how.
1. Set your mind on your goals and plan how to reach them. Together with your spouse, make a list of everything you want that would require financial commitment: holiday vacations, family car, emergency fund, children’s college education, retirement. Sort out the short term, medium term, and long term goals. Assign the amount needed and work back to know how much you need to set aside annually, monthly or weekly.
2. Money coming in should be greater than money coming out. You can do this in two ways: control your expenses or increase your income. If finding an additional source of income seems impossible, your only choice is to change your lifestyle. This may be difficult if you do this abruptly. Plan out how to curb your expenses and do it gradually.
3. Place a strict amount for discretionary expenses and pay them in cash. This will make you re-evaluate your expenses. For instance, with $20 for discretionary purchases each week, you would think deeply whether to purchase that $5 cappuccino or just have the regular coffee at just a fraction of a dollar. This practice will make your cash go a long way.
4. Set up a fund for emergencies. The fund should equal your earnings for six months. This will give you leverage to recover from an emergency, whether hospitalization, losing your job or car breakdown for the next six months.
5. Monitor your spending and adjust when required. Compare actual spending with your budget. Take a look at your bank statements and receipts. They speak volumes about your spending habits.
Go over your past expenses. Note any extraordinary expenses. Forecast what’s going to happen next week or next month and figure out how to manage your finances through it.