You don’t need to wait until you’re earning a six-figure salary to start managing your personal finances. In fact, a good personal finance management plan can help you achieve your financial objectives. Personal finance management includes managing income generation, spending, saving and investment. A sound financial plan will help you get out of debt, prepare for emergencies and save money for your retirement.
How to achieve Stress-Free Personal Finance Management
Create a Budget
The first and most important step to any personal finance plan is a budget. If you’ve never created a budget before, it may take you a while to get used to it. Separate all your expenses into fixed and variable – this will allow you to focus on your variable expenses so that you can find ways to trim it down wherever possible. Finance management is impossible without a budget as you will land up spending your money as quickly as you earn it or even faster which would lead to debt. With a budget, you will be able to monitor your spending, reduce existing debt and keep a track of your progress towards your financial goals. You might experience some anxiety at the start but a regular budget will give you a clearer idea of your financial situation and help to reduce stress.
Define your Financial Goals
Personal finance management does not mean that you will have to stay home every weekend while your friends are out partying. You will still be able to enjoy your regular lifestyle – the only difference is that you would need to make mindful purchases. Your financial goals can be divided into 3 basic categories: short-term goals, mid-term goals, and long-term goals. Typically, short term financial goals can be achieved within a year. This would include purchases such as a new laptop or phone. A mid-term goal takes less than 5 years to accomplish and this would include things like paying off credit card debt. A long-term goal will take over 5 years to complete and would include saving for a home or retirement. Defining your financial goals and prioritizing them will help you manage your finances wisely in order to gain financial freedom. This is especially important for self-employed individuals as it can help to grow your budding small business.
Pay off Credit Card Debt
According to a recent AICPA (American Institute of CPAs) survey, 30% of the survey respondents named interest payments on credit cards as the cause of their debt. Credit card debt is particularly stressful as the high-interest rate means that it can take years to pay off a small debt if you only make minimum payments. The credit card system enables people to make poor financial decisions and within a short period of time, they find themselves saddled with debt. When you are strapped for cash, you might be tempted to make just the minimum payment but this will just bleed you dry in the long run. Clearing your credit card debt has to be a priority which means that you should pay as much of it as possible each month and find ways to cut back on your other expenses.
Have an Emergency Fund
Emergencies are unpredictable but that doesn’t mean that you can’t prepare for them. You may lose your job or have unexpected medical bills – whatever the case, you need to have an emergency fund as your safety net. A Federal Reserve Board study found that only 53% of respondents could cover an emergency expense of 400 USD without the need to borrow money. As a rule of thumb, your emergency fund should cover 3-6 months of your living expenses. An emergency fund will also ensure that you are not forced to rely on your credit card and land up drowning in debt. Furthermore, just knowing that you have an emergency fund to fall back on when needed, will help to lower your stress levels.
Save for Retirement
When you’re in your 20s, retirement can seem like a lifetime away which is why most young adults don’t bother with a retirement savings plan. However, the sooner you start saving for your retirement, the more you will benefit from it, thanks to compound interest. Saving for your retirement will also help reduce your current income taxes if you use a tax-advantaged fund. A personal finance management plan that includes substantial savings for retirement can even help you retire early. This is especially important if you are interested in giving up your 9 to 5 job to turn your hobby into a business.
The simplest way to enjoy stress-free personal finance management is to live below your means. This simple habit will allow you to lead a fulfilling and satisfying life without the need to overspend. It is not easy to resist the lure of consumerism but mindful spending will give you financial freedom. It will also help you build resiliency by improving your coping skills and adaptability.
- Book: The Last Chance Millionaire
- Best Financial Management Tips to follow during Covid-19
- Evaluating Financing Options for Your Business: Myths and Facts
- Pros and Cons of Financing a Business
- Best Credit Cards for Every Type of Purchase