Managing personal finances is quite complicated, but it does not need to be. You all try to make some efforts to manage your money in better ways, but you come up with so many hurdles along the way that this entire process eventually turns out to be one step forward, two steps back.
Money management is not rocket science, and you do not need to earn a lot of money to make most of your money. As long as you can meet all of your expenses, including unforeseen costs, you are making most of your money.
Many people that you need to have a six-figure salary to make ends meet, but despite that, you will be running out of money if you are prodigal. When it comes to money management, you need to understand your spending behavior and priorities.
Make a priority list.
You cannot manage your money efficiently unless you know your priorities. It seems easy to ask yourself about your preferences, but getting a specific answer is not easy. You must understand what matters to you. Some people do not consider their priority and don’t make their priority list, so they always fail to manage financial stability in their lives.
When it comes to setting financial goals, you can have a wide range of them. It can be either getting materialistic things or building up your wealth. There is nothing wrong if you have a long list of various goals, but the most important thing is you are honest while setting priorities.
Once you have made a list of your financial goals, you should start ranking them. You will assign the first rank to what is very important for you, and then comes the second, third, and so on.
The objective of establishing rank is to encourage you to move in the direction of achieving your goal. Make sure that you do not copy others to set priorities because they vary from individual to individual.
Once you have set financial goals, the next step is to make an effort to achieve them. Here are the two golden rules you need to follow to make most of your money so you can achieve your financial goals.
Rule 1: Save 25% of your income
This is the basic rule for money management. You cannot make most of your money without saving. When you have saved a certain amount of money, you do not need to bother about your spending. This is because you know you are free to spend the rest of the money whatever way you want.
You feel spending guilt when you compromise with your saving goals. If you have already set aside money, no worries are left. You will guess that you are collecting sufficient money, so there is nothing to worry about. Overspending problems generally arise when you do not prioritize your savings.
However, it is crucial to know how much and for what you are to save. If you do not know the answer to this question, you cannot have confidence in saving money. The rule of thumb says that you should stash away 25% of your income for long-term expenses.
It can include investment for various significant expenses that you are likely to experience down the line. They can range from mortgage to car, retirement, health insurance, and investments in stocks, bonds, and mutual funds to create wealth.
This money can help you build your wealth and assets over time. Note that this is a rule of thumb to set aside 25%. It can be more or less depending on your current needs. If you successfully manage to stash away this much money, you will build your wealth over time.
If you do not earn a lot of money, make sure that you manage your regular expenses smartly to maintain this ratio.
Rule 2: Should limit housing cost to 20%
As has been said above, you should adjust your regular expenses to maintain the 25% saving goal. You all try to focus on discretionary expenses because they are what you can control over easily. Still, the fact is that it is fixed expenses taking a large chunk of your money and the most notorious one is the housing cost.
Regardless of your income and saving goals, it is hard to save money, and it is straightforward to spend money. You do not need a solid reason to spend money, but it takes a lot of motivation to push yourself to put aside money. This is why you need to carefully evaluate your budget to ensure that your money is not going down the drain.
Housing cost can be unexpectedly high whether you rent a flat or own it, and if you evaluate your budget, you will find that it is eating up a large portion of your income. This is why it is crucial to find ways to cut back on the housing cost.
Your housing cost should not be more than 20% of your income. The housing cost includes mortgage payments, taxes, insurance, and rent (in case you do not own a house), and the like. Financial experts assume that you live in an affordable house if you are not paying more than 20% of your income.
Note that it is just the rule of thumb. It is not set in stone. Like you can adjust the percentage for your saving goals, you can adjust the percentage for the housing cost. It all depends on your priorities and current financial condition.
Spending 20% of your income on housing can be way too much if it is not a big priority for you. In that case, you would be happier to spend about 15% of your income.
The final word
Money management can be easier by following the golden rules mentioned above. If you successfully manage your money, you will not end up running out of money during financial emergencies, and you do not need to keep applying for loans for very bad credit with direct lenders all the time.