Money management or financial planning involves taking different steps to streamline your finances. Thankfully, managing your finances isn’t as difficult as it seems. You can easily improve your financial condition by taking some simple steps that we mention in this article. Read on to find out.
1- Create a budget
Creating a budget is a great way to become disciplined with managing your money. One of the popular and easiest approaches to creating a budget is the 50/30/20 budgeting rule. It involves spending 50% of your after-tax earnings on needs, and 30% on wants while saving the remaining 20%. Budgeting allows you to spend your money strategically and gives you greater control over your income.
2- Monitor and control your spending
The best way to monitor and control your expenses is by recording them in an expense tracking app on your smartphone. When you record your daily transactions in an app, you can draw important insights from it at the end of the month. For example, if you find out that you spent too much money on dining out, you can consider cutting those expenses to remain within your budget.
3- Create emergency and sinking funds
An emergency fund is used to save money for emergencies, whereas a sinking fund is used to save money for planned big purchases. Ideally, you should have at least three to six months’ worth of your expenses in an emergency fund. The emergency and sinking funds allow you to fund your planned and unplanned expenses without having to take out loans, which can save you plenty of money in interest charges.
To save money for your emergency and sinking funds, you can consider setting up automatic deductions from your salary account to your separate savings account created for these funds. This will ensure that you achieve your savings target as soon as you receive your paycheck.
4- Invest your savings
After achieving your savings target for the month, you need to invest your money where it can earn profit. You can buy stocks, units of mutual funds, or invest in private pension schemes to earn a return on your investment. If you keep your money in a checking account that doesn’t earn any interest, your money would lose its value due to inflation. By investing in different asset classes, you give yourself a chance to earn a profit on your idle money.
5- Pay your credit card bills on time
If you use a credit card for your purchases, you should pay your bills in full and on time to avoid attracting exorbitant interest charges. It might feel convenient to pay just the minimum amount instead of the full amount, but you’ll have to pay high-interest charges, which can potentially fall you into a debt trap.
Final Thoughts
Money management is all about effective financial planning. Effective money management skills involve creating a budget, monitoring and controlling your spending, setting up emergency and sinking funds, investing your savings, and paying off your bills timely and in full. If you follow these steps, you will notice a significant improvement in your financial condition.
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