When your financial outputs exceed your inputs, you know you have a problem. What about when you still make more than you spend, but you are not saving much?
Personal finance is managing how you allocate your money, pay your bills, and make savings and investment decisions.
Budgeting may have become a little easier as your income has increased. You may feel confident that you are on track to meet your short-term objectives, but what about retirement, tax, and estate planning?
Many people are paralyzed by indecision. They know they could invest their money better. They aren’t sure if they have enough and the right types of insurance. They have thought about tax and estate planning, but the process is a bit intimidating when it comes down to it. Fear of making a mistake leads many people to choose the safest and sometimes the most familiar option, putting their money in a low-interest certificate of deposit where it is safe in a bank.
The Basics of Personal Finance Are Not That Hard
We all learned at an early age. You can’t spend more money than you earn. If you do, you will go into debt. Sooner or later, it will catch up with you, and you will have to dig yourself out of a hole. This is not the way to build wealth.
To accumulate wealth, you need to spend much less than you make and then save the rest. The more you can save, the better. Your money can work for you then, either in a savings account or an investment. Of course, moderation is key. Otherwise, just like with a diet, you might give up and swing too far in the opposite direction—going on an eating or spending binge. Deprivation for too long is not sustainable, and it is no fun either.
Prioritize your spending. Of course, you need to pay your bills, but then consider the value you get from spending the remaining money. Is it really worth it to spend your hard-earned cash on a fleeting pleasure that you won’t remember in a week?
On the other hand, saving for the sake of saving is no good either. A bank account full of money and a life devoid of pleasure is too far on the other end of the spectrum. Moderation is key.
You Need to Earn More Money
If you don’t want to cut back on your spending but aren’t saving much, another option is to earn more money. When it comes right down to it, money is a tool. You use it to get what you need and want. Spending less money is only going to get you so far.
How can you increase your earnings? Work more hours, increase your earning potential by learning new skills, get additional training or education, or make your money work harder for you. If you want to build wealth, you need to invest your money. You need to use your money as a tool to make more money. Don’t know how?
Investing mistakes can cost you a lot of your hard-earned money. You can invest in the financial markets, a business, real estate, or something else. Many people jump into flipping houses as a real estate investment. You can lose a lot of money if you don’t know how to value real estate, understand the current market, and accurately estimate repair costs.
For most people new to investing, the best and simplest option is to invest in a globally diversified stock market portfolio. The question is, is that the best way to invest YOUR money?
Your Personal Finance To-Do List
Create a budget: Many people use the 50/30/20 budgeting plan to create a budget. Your bills are paid with half of your income. Thirty percent of your budget is set aside for discretionary spending based on your priorities. Twenty percent is invested in you and your loved one’s futures. Pay down your debt, save for a college education or retirement, create an emergency fund.
Make an inventory of your credit cards: Set aside some time to really look at your credit card bills. How much did you spend last month, how about in the previous six months? Would you use your money to make those same purchases today? Why or why not? Are you paying your credit card bills each month, or are you carrying a balance from month to month? The interest you are paying on your credit card bills could be used to build your wealth. Your credit card spending is crucial to establishing your credit rating—a topic for another day!
Set financial goals: Consider your short-, middle-, and long-term goals. It is a good practice to write them down and keep them visible so you can refer to them when making financial decisions. Is saving for retirement your top priority? What about paying off your home? Prioritize your short and long-term financial goals. Use the SMART acronym to help develop your plans.
- Specific: Try to be as precise as possible.
- Measurable: Write down your goal so you can keep track of it. You will pay down the principal on your home loan principal by X amount per month.
- Achievable: An unattainable goal is demotivating and frustrating.
- Realistic: Review your financial plan and evaluate your discretionary income. Is the sum you intend to spend to reach your financial goal reasonable?
- Time-bound: Set clear checkpoints for yourself so you can track your progress toward meeting your goals.
Plan for your family’s future: Do you have a Last Will and Testament, and, depending on your needs, a trust? Have you appointed guardians for your children? Have you completed a living will and healthcare power of attorney?
Assess your insurance needs: Look into the costs and benefits of auto, home, life, disability, and long-term care insurance.
Your financial plan, like your estate plan, is not a one-and-done document. Review your financial plan every time you have a significant change in income or expenses, a job change, a change in your family structure, a change in living quarters, an inheritance, or a change in your financial goals.
Building wealth takes time, patient, and consistency. As you learn more about financial investing, you can make your money work harder for you. In the meantime, work through your personal finance to-do list. Prioritize your spending, regularly assess your progress towards meeting your financial goals, and exercise restraint when an opportunity arises that you may regret spending your money on in the future!
If you are feeling unsure about your financial plan, we can help.