The sooner you start financial planning the better, but it’s never too late to create financial goals to give yourself and your family financial security and independence. Here are the best practices and tips for personal finance.
1. Know your income
All of this means nothing if you don’t know how much you bring home after taxes and withholdings. So before deciding anything, make sure you know exactly how much take-home pay you get.
2. Formulate a budget
A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method provides a great framework. It breaks down like this:
- Fifty percent of your take-home pay or net income (after taxes) goes toward the necessities of life, such as rent, utilities, groceries, and transportation.
- Thirty percent is allocated to discretionary spending, such as dining out and shopping for clothes. Giving to charity can also go here.
- Twenty percent goes toward the future by paying down debt and saving for retirement and emergencies.
Managing money has never been easier, thanks to a growing number of smartphone personal budgeting apps that put everyday finances in the palm of your hand. Here are just two examples:
- YNAB (acronym for You Need a Budget) helps you track and adjust your spending to control every dollar you spend.
- Mint streamlines cash flow, budget, credit card, bill and investment tracking from one place. It automatically updates and categorizes your financial data as information comes in, so you always know where you stand financially. The app will also provide custom tips and advice.
3. Pay yourself first
“Pay yourself first” is important to ensure you have money set aside for unexpected expenses, such as medical bills, major car repairs, day-to-day expenses if you’re laid off, and more. An ideal safety net is three to 12 months of living expenses.
Financial experts generally recommend putting away 20% of each paycheck each month. Once you fill your emergency fund, don’t stop. Continue to funnel 20% monthly toward other financial goals, such as a retirement fund or a down payment on a home.
4. Limitation and Reduction of Indebtedness
It sounds simple enough: Don’t spend more than you earn to keep debt from getting out of hand. But, of course, most people have to borrow from time to time, and sometimes going into debt can be beneficial – for example, if it leads to the acquisition of wealth. Taking out a mortgage to buy a house can be one such case. However, sometimes leasing can be more economical than buying outright, whether it’s renting a property, leasing a car, or getting a subscription to computer software.
On the other hand, reducing repayments (for example, to interest only) can allow income to be invested elsewhere or put into retirement savings while your nest egg maximizes the benefit of compound interest while you’re young. Some private and federal loans are also eligible for rate reductions if the borrower enrolls in Auto Pay.
Student loans account for $1.59 trillion in consumer debt—if you have outstanding student loans, you should prioritize them. There are numerous loan repayment plans and repayment reduction strategies available. If you are stuck with a high interest rate, the principal can be paid off quickly.
Federal repayment programs worth checking out include:
- Graduated Repayment :- Gradually increases monthly payments over 10 years
- Extended Repayment :- Extends the loan over a period of up to 25 years
- Income-driven repayment :- limits payments to 10% to 15% of your income (depending on your income and family size)
5. Borrow only what you can pay back
Credit cards can be a huge debt trap, but in today’s world not owning one is unrealistic. Additionally, they have apps besides buying things. It’s crucial for establishing your credit rating and is a great way to track expenses, which can be a significant budgeting aid.
Credit needs to be managed properly, meaning you must pay off your balance in full each month or keep your credit utilization ratio to a minimum (ie, keep your account balance below 30% of your total available credit).
Given the extraordinary rewards and incentives (such as cashback) offered these days, it makes sense to charge as many purchases as possible—if you can afford to pay your bill in full.
Using a debit card, which takes money directly from your bank account, is another way to ensure that you don’t pay for small purchases accumulated over an extended period with interest.
6. Monitor your credit score
Credit cards are the primary vehicle through which your credit score is built and maintained, so looking at credit costs goes hand in hand with monitoring your credit score. If you ever want to get a lease, mortgage, or any other type of financing, you’ll need a solid credit report. There are different types of credit scores available, but the most popular is the FICO score.
Factors that determine your FICO score include:
- Payment history (35%)
- Balance (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New Credit (10%)
FICO scores are calculated from 300 to 850. Here’s how your credit is rated:
- Exceptional: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Very poor: 300 to 579
To pay bills, set up direct debit where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. Additionally, you can detect and address errors or fraudulent activity by monitoring your credit report. Federal law allows you to get free credit reports once a year from the “Big Three” major credit bureaus: Equifax, Experian and TransUnion.
The reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport.com, an official federal site sponsored by the Big Three.
Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, but it may not be your FICO score. All of the above offer your VantageScore.
7. Plan for your future
To protect the assets in your estate and ensure that your wishes are followed when you die, make sure you make a will and—depending on your needs—possibly set up one or more trusts. You should also look into insurance and find ways to lower your premiums if possible: auto, home, life, disability and long-term care (LTC). Periodically review your policy to ensure it meets your family’s needs through major life goals.
Other important documents include a living will and a healthcare power of attorney. While not all of these documents directly affect you, they can all save your next of kin significant time and expense when you become ill or otherwise incapacitated.
Retirement may seem like a lifetime away, but it comes much sooner than expected. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisers call the magic of compound interest — how small amounts grow over time.
Setting aside money now for your retirement can not only grow it over the long term but can also reduce your current income taxes if the funds are placed in a tax-advantaged plan, such as an Individual Retirement Account (IRA), 401(k) ). or 403(b).
If your employer offers a 401(k) or 403(b) plan, start paying into it right away, especially if your employer matches your contributions. By not doing so, you are giving up free money. Take the time to learn the difference between a Roth 401(k) and a traditional 401(k) if your company offers both.
Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before choosing to take Social Security benefits (which is smart for most people) and converting term life insurance policies to permanent life.
8. Buy insurance
As you get older, it’s natural for you to accumulate many of the things your parents did – family, house or apartment, belongings, and health problems. Insurance can be expensive if you wait too long to get it. health care, long-term care insurance, life insurance; All those costs increase as you get older. Plus, you never know what life will send your way. If you are the sole breadwinner for the family, or both you and your partner work to make ends meet, a lot depends on your ability to work.
Insurance can cover most hospital bills as you age, leaving your hard-earned savings in the hands of your family; Medical expenses are one of the leading reasons for debt.
If something happens to you, life insurance can give those you leave a buffer zone to deal with the loss and get back on their feet financially.
9. Maximize tax breaks
Due to an overly complicated tax code, many people leave hundreds or even thousands of dollars on the table each year. By maximizing your tax savings, you’ll free up money that can be invested in reducing past debt, enjoying the present, and planning for the future.
You should start saving receipts and tracking expenses for all possible tax deductions and tax credits. Many office supply stores sell helpful “tax planners” that have major categories already labeled.
After you’re organized, you’ll want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, tax deductions reduce the amount of income you are taxed on, while tax credits reduce the amount of tax you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.
10. Give yourself a break
Budgeting and planning seem fraught with disadvantages. Make sure you reward yourself now and then. Whether it’s a vacation, shopping, or the occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial freedom you’ve been working so hard for.
Last but not least, don’t forget to delegate when needed. Even if you’re competent enough to do your own taxes or manage a portfolio of personal stocks, that doesn’t mean you should. Setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant (CPA) or financial planner—at least once—can be a good way to jump-start your planning.
Personal Finance Skills
The key to getting your finances on track is to use the skills you already have. It’s also about understanding that the principles that contribute to success in business and your career also work in personal money management. The three key skills are prioritizing finances, evaluating costs and benefits, and controlling your spending.
Finance Prioritization: This means you can look at your finances, know what keeps the money flowing, and make sure you focus your efforts on those.
Evaluating costs and benefits: This key skill prevents professionals from spreading themselves too thin. Ambitious individuals always have a list of ideas about other ways they can hit it big, whether it’s a side business or an investment idea. While there’s a place and time to take a flier, running your finances like a business means stepping back and honestly evaluating the potential costs and benefits of any new venture.
Control Your Spending: This is the final big-picture skill of successful business management that must be applied to personal finances. Often, financial planners sit with successful people who still manage to spend more than they do. If you spend $275,000 a year then earning $250,000 a year won’t do you much good. Learning to control spending on non-wealth-building assets until you meet your monthly savings or debt reduction goals is important to building net worth.
Personal Finance Education
Personal money management is not one of the most popular subjects in educational systems. Many college degrees require some financial education, but it’s not focused on individuals, which means most of us have to get personal financial education from our parents (if we’re lucky) or learn it ourselves.
Fortunately, you don’t have to spend a lot of money to find out how to manage it better. You can learn everything you need to know for free online and in library books. Almost all media publications regularly offer personal finance advice as well.