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Being able to manage one’s finances should be incredibly simple; but in reality, the opposite is often true. The world of personal finance is now so large and complicated that finding your way through can often feel almost impossible.
As a result, we thought it might be beneficial to present a far simpler look at what is required to truly keep your finances in check at all times – a few guiding principles that can help to protect your financial future. Read on to find out more.
Always save 50% of a pay rise
A pay rise should always improve a person’s financial situation, but often, this isn’t actually the case: pay rises can often be rendered almost irrelevant. How is this possible? Simple: as people earn more, they tend to spend more too. It’s natural to want to spend a little more on treats and luxuries if you receive a pay rise, but do try to save at least 50% of the extra funds – this helps to ensure that the pay rise benefits both your life today and your financial health for the future.
A “rainy day fund” is essential
A rainy day fund – sometimes referred to as an emergency fund – is the best way to protect yourself against a sudden difficulty or change in circumstance. For example, a major kitchen appliance breaking down and needing to be replaced can be an unpleasant shock to any budget; but with a rainy day fund, you can make the replacement without having to use credit, or somehow muddle through to the next month’s income. A change of circumstances can also call your rainy day fund into use; if you sustain a personal injury, then a rainy day fund can be called into action to help you meet everyday expenses until the point where you can work with Fund Capital America to access a lawsuit payout. Look to build a “base” rainy day fund of around $1,000, and then continue to add small amounts – $10 or $20 – per month.
Monitor your credit score every month
A good credit score means that you receive preferential lending rates and you’ll also pass credit checks that are conducted for non-financial purposes (such as taking out a cellphone contract or even being hired for a job). However, your credit score can be impacted by issues that are entirely out of your control: for example, a company could make a mistake on your file, or you could be a victim of identity theft. Checking every month ensures you will be able to identify any issues – and then resolve them – immediately, so your credit score will always be completely under your control.
Include a contingency in your budget
As most people are aware, establishing a monthly budget is one of the best things that you can do for your personal finances in general – but the need to include a contingency in that budget is less well-known. The purpose of a contingency is to cover any expenses that do not fit into other areas of your budget, so there is no need to use credit or find yourself in a situation where a non-budgeted payment needs to be made, but you have no funds available to make it. A contingency of around 10-15% of your total budget is usually recommended.
Save without seeing
Saving is something that many people find difficult, and one of the main reasons for this is that it can feel like a loss. If, for example, you have $500 available after bills, and you save $250, then it feels like you’re down $250. Yes, the money is still technically available, but it’s set aside for another purpose, so it feels like it’s vanished and you “only” have $250 left – which can feel disheartening if there are other expenses you want to meet or things you need to buy. To overcome this, choose to “save without seeing” – i.e. setting up automatic debits from your account to move a set amount into your savings as soon as you are paid. With the previous example, that would mean you never truly “see” $500, so you can’t “lose” it: instead, you can just work from the $250 that you have available.
Be open to investing
Investing is a topic that many people shy from, usually due to unfamiliarity or concerns about potential risk – which is understandable, to an extent. However, savings account returns can be relatively meager in an era of historically low-interest rates, which means investing – with the assistance of a financial advisor, of course – can often be the preferable choice, for some of your savings at least. This is especially true due to the impact of inflation; essentially, if your savings return less than inflation (which is currently 1.7% – far higher than many savings accounts) then you’re actually losing purchasing power each year.
Understand the benefits of delayed gratification
Delayed gratification is always a difficult sell: most people, quite understandably, would rather have something now rather than having to wait until a later point. However, when it comes to personal finance, waiting until later is almost always going to produce the preferable results. Savings and investments, for example; the longer you wait, the greater the return will be. What’s more, waiting to buy a new phone rather than buying on release day saves you a small fortune on the purchase; as does waiting for sales seasons to arrive when making big purchases. Finally, simply waiting to make a purchase at all can save a significant amount of money; often, just deferring for a few days can take the heat out of the moment and make it easier to decide not to buy. Yes, for all of these reasons, understanding – and outright prizing – delayed gratification will always be a key part of good financial management.
Financial management doesn’t have to be overly complex or difficult; instead, adhering to the principles above should ensure good financial health long into the future.