Financial rumination is something we all go through despite the amount of money we earn. You could be earning a decent amount and still feel financially insecure or you could be earning an average amount yet feel free of financial distress.
You might wonder why this discrepancy exists. What magical maneuvering is required to keep your finances in check? Well, the truth is you don’t need any expertise to get your personal finances in check. All you need to do is get the basics right.
And this article is a great place to begin learning. We shall look at 6 key elements in strengthening your personal finances and creating a secure future.
Recording your finances is the most fundamental step which eventually opens the door to enhanced financial stability. We spend money on several different things each month and within this spending, patterns emerge. You cannot read nor understand those patterns without recording your finances.
The best way to is to track your expenses every month. Create a list of monthly expenses, such as basic needs (rent, groceries), and miscellaneous items (e.g. shopping, purchasing apps). Now, subtract this from your monthly income. The goal is to always spend LESS than you earn.
Despite how easy tracking our spending seems, most of us fail to do this consistently. Our focus on the short-term hinders us from working on this relatively long-term project. The best tip is to download an expense tracking app and set a reminder each day to track your expenses. Soon this shall become a habit and at the end of the month you can reap the rewards of this simple daily exercise when it will come to analyzing finances. There is multiple free accounting software that will help you in budgeting.
2. Cutting expenses
There are only two ways to improve your financial condition: earn more income and cut existing finances. For most of us, only the second option exists within our immediate control.
After settling into the habit of tracking expenses, you have the freedom to eliminate unnecessary expenditures. Most of us spend way more than we should. Do you need that new pair of shoes every month? Once you glance that your budget and look at the huge chunk an unnecessary want is consuming, you can not only appreciate the value of recording expenses but prevent yourself from making bad financial choices.
Each item we buy has an opportunity cost. That cost is often suppressed when the urge to buy something hits. However, having a monthly budget in mind makes you stop for a moment and ask yourself: If I make this purchase, I won’t be able to save up for that other more important item I have been meaning to buy for some time.
Moreover, we tend to buy something wandering through a supermarket. The prevalence of shopping centers acts as a cue to spend, and often this spending is unnecessary. Recognizing this urge to spend triggered by the presence of goods is an important factor in cutting down expenses.
3. Emergency Fund
Most of the time, the threat of financial instability slowly knocks on our door and gives us the time to get it together. This expectation often has us unprepared when the threat straight-up knocks down the door without a warning. Life is unpredictable, making us vulnerable to a host of unwanted circumstances like as a medical crisis or our car breaking down.
Such situations can make plummet us into the hole of financial turmoil, forcing us to rack up high-interest credit card debt or defaulting on our bills.
To avoid this, we can save up to create an emergency fund. Saving can only follow if you track your expenses and cut down costs.
The emergency fund should not be locked up in a CD or invested somewhere long-term but be accessible anytime. The best way to do this is by storing it in a high-interest checking or savings account.
4. Credit Card Trap
The ease of buying more than you can afford is known as the credit card trap. Avoiding a credit card balance is crucial to financial security. The key is ensuring you pay off your card in full each month, more than the minimum amount due.
This is because the high-interest rates imposed by credit payments can accumulate into huge sums over a prolonged period.
You could also look at the balance transfer credit card options which allow you to start fresh, moving the balance to a new credit card with 0% interest for a while. However, this only works if you completely pay off your bills before that period expires.
5. Early retirement
Enjoying a retired life is impossible without having saved a considerable amount of money. The only to ensure you have plenty left at the time of retirement is by starting saving for retirement early.
Most of us feel we do not have enough to save for retirement each month. That is true. Saving a huge chunk of money for decades later seems rather pointless. But this reasoning underestimates the power of compound interest: You earn interest not only on your contributions but accumulated interest. This means even setting aside a little each month can grow into plenty over time.
For retirement options, you could either contribute to your employer’s plan such as the 401K or open a traditional IRA.
Retirement saving alone might not be enough to ensure a breezy life after work’s out. You should not ignore investment options like stocks, mutual funds, and bonds. These options are often offered by retirement accounts.
After having thoroughly explored and followed are the above tips, you are set to create a solid financial foundation after this last layer of protection: Insurance.
Let’s be honest. Emergency funds cannot withstand all accidents and disasters. Emergency funds should not be even used for financial vulnerabilities that can be ensured. Life insurance, disability insurance and homeowners insurance come in to fight the big battles life throws at us.
Insurance is particularly pertinent if you have members in your family who aren’t earning. This exacerbates your financial burden. And if the worst scenario arrives, like a medical crisis, you want to have long-term disability insurance or term life insurance.
Although term life offers you insurance for a set period of time, it is much cheaper than permanent life insurance. However, it is best to choose according to your personal needs.
We have looked at six basic elements to building financial security.
- Cutting costs
- Emergency fund
- Credit Card Trap
- Early retirement
It is important to recognize these elements build upon each other. So, it would be wise to go through them in the given order instead of directly jumping ahead. Budgeting lays the groundwork for financial improvement in your life, allowing you to carry out the most basic step: cutting costs. Everything else slowly builds on this. The last thing to mention is— this is important to remember— that fixing your finances is a long-term process that begins with daily effort.
This means the importance of something as simple as tracking a daily expense has immense benefit in the long-term only if you do it consistently. Just like spending is not restricted to a certain period, nor it is getting your finances together. It is a process you learn and get better at with time. But it always begins in the immediate moment.
Learn More: Basic Accounting For Entrepreneurs