If you’re seeking financial independence, you’re not alone. Many of us want to attain a state of financial freedom and comfort in life.
A significant part of achieving financial independence and success for the future is associated with how you manage your current finances.
Here is what you need to know about successfully managing your finances:
Paying Yourself First – The Art of Smart Saving
Simply stated, ‘paying yourself first’ is the foremost principle of personal finance. It works simply: each month, set aside a certain amount of money from your monthly paycheck. This is the first thing you should do with your salary every month.
Before doing anything with your money, your aim should be to work towards your financial future and prosperity. In other words, invest that money somewhere.
Make it a top priority and lifelong habit, and you’ll slowly inch your way towards financial independence and prosperous retirement.
An alternative option is to save whatever amount you’re left with at the end of the month. However, success with this method may be limited as it has several drawbacks.
Often, our spending habits are such that we don’t have enough money left at the end of the month. Therefore, the saved amount may be inadequate.
This method also requires patience and self-control. Unfortunately, most people lack the discipline to set aside large sums of money at the end of each month.
But the overall result is different from the pay-yourself-first method. Your monthly contributions will go straight into a savings account or 401(k) as soon as you receive your paycheck.
Since this money is not within your reach, you won’t be tempted to spend it. The amount will be withheld automatically at the start of each month.
However, you must adjust your spending habits according to your remaining income. Although this may be challenging, streamline your spending and cut down costs.
Creating a Budget
You can’t undermine the significance of a good budget. A budget is essentially a short-term financial plan.
Meeting your savings targets and managing your expenses without a concrete financial plan is difficult. You need to have a solid plan to achieve these financial goals, which is where budgeting plays its role.
A budget is essential to gain financial freedom. With budgeting, you’ll always have cash in hand for crucial things.
One of the primary benefits of budgeting is that it can keep you out of debt. Even if you’re in debt, you can manage and eventually pay it off with monthly budgeting.
Creating a budget involves prioritizing your monthly expenses in order of importance. You spend only on those things that matter to you and your family.
Budgeting can help you to avoid unnecessary spending, too. Instead of throwing your money on anything that tickles your fancy, you learn to spend more prudently.
Often, we spend money on a whim to discover that the significant expense was unnecessary. Later, we regret having made the purchase. You can avoid these types of unpleasant scenarios and unnecessary expenses with budgeting.
Briefly, budgeting can help you to save plenty of money at the end of each month and still be able to purchase the things that matter to you.
Managing Your Debt Wisely
Managing debts wisely is crucial to your financial well-being and stability. Debt management should be a priority for those drowning in debt.
You can take several steps to pay off your debts. First, make a list of your debts (also called liabilities). After that, note down the monthly repayment amount, the outstanding balance, and the due date of each loan.
Keep this list somewhere you can see it easily, and use it to make timely repayments. As your liabilities keep changing, keep updating the list.
Remember to pay your debts on time to avoid interest and late fees. These expenses will only make it harder for you to pay off your debt, so try to avoid these costs as much as possible.
One debt repayment method is called the debt avalanche. This is where you prioritize your debt according to its interest rate.
For example, credit cards can have exorbitant interest rates, which is why you should pay off your credit card debt first in most cases. So once you rank your debt in order of the interest rate, you can make the debt payments in order of priority.
Another option is the debt snowball, made famous by Dave Ramsey. With this method, you list out your debts in order of smallest to largest balance (regardless of the interest rate), and prioritize paying it off in that order.
You’ll also need to limit your expenses as far as possible to manage your debt. You may have to live frugally for some time, but it’ll be worth it.
Once you’ve paid off your debt, you can plan for your financial success.
Being Prepared For Life’s Unexpected Events
Emergencies can happen anywhere, anytime – life is full of unexpected surprises. These events can often be detrimental to your finances, so it’s necessary to plan in advance to mitigate the adverse effects of unforeseen circumstances.
To be prepared for a crisis, you should maintain a savings account or an emergency fund. Keep enough cash in these accounts to pay for necessities for at least three to six months.
Necessities include utility bills, mortgage payments, food, accommodations, and more. Entertainment and other non-essentials should not be excluded in this list.
Emergency funds can be useful in the case of an accident, disability, loss of employment, or unforeseen incidents, so it’s best to be well-prepared with money you can access quickly.
Besides keeping an emergency fund, you should invest in insurance plans. Health and disability, business, and auto insurance are essential insurance plans that can help you to mitigate the detrimental effects of various disasters.
This is pretty common-sense, but it’s important to call out. Without these types of insurance, it could be irrelevant how much money you have set aside because the bills can be astronomical.
A comprehensive health plan is now necessary for treating various medical conditions. Medical costs are high and beyond the reach of most people.
In fact, high medical expenses are the leading cause of personal bankruptcy. Although dealing with a severe medical condition is painful, high medical bills can aggravate the situation further. Therefore, you should never go without health coverage.
Similarly, life insurance can safeguard the financial future of your family. Thinking about your own death is unpleasant, but accidents do happen and they strike without warning.
If the worst happens, a life insurance plan can minimize your and your family’s difficulties. It can also serve as a vehicle for saving money as good policies allow you to grow your investment.
Depending on your location, you may also need to plan for natural disasters. Natural disasters continue to inflict billions of dollars in financial losses each year in the U.S. If you live in a high-risk region frequently hit by natural disasters, you need appropriate insurance coverage.
Learning to Start Investing
Most people know that an adequate investment portfolio is imperative for financial success. But they don’t know how to start. Often, we’re apprehensive because of the risk – no one likes losing their investment money.
Many people think they have to be a financial expert to ensure successful investments. This is true to some extent – the highest returns tend to go to those with the best financial knowledge.
But you can still gain healthy returns if you have some idea about investments. The first thing you need to realize is that investment is not an option; it’s a necessity.
Saving your money each month and putting it aside is not enough. You must invest it, so it generates income. This way, you can live a comfortable life during retirement.
Even if you feel you don’t need the extra income, you should still invest. Due to inflation, the value of savings has been diminishing with time. If you don’t invest your money, inflation can erode the value of your savings.
You’ll also lose several earning opportunities. Although this is not obvious, it’s still a loss.
If you keep $10,000 under your mattress for a year, your loss is $500 for a 5% interest rate. This is a significant amount, which will aggregate over time.
It’s quite apparent that not investing can lead to guaranteed losses. Keep this in your mind if you’re reluctant to invest due to the fear of losing your money.
But with the right investment plan, not only can you minimize your losses, but your savings can also yield handsome profits.
If you’re new to investing, you can use the services of a financial advisor. However, they usually charge high fees for their services.
If you want to avoid this cost, you can invest with a robo-advisor. Here, an algorithm makes investment decisions on your behalf, based on your investment objectives and risk appetite.
However, robo-advisors are not free of cost. But they are less expensive than financial professionals.
You can also invest on your own. Helped by exchange-traded funds, you can easily create a diversified portfolio. Even then, if you prefer a hands-off approach to investment, then robo-advisors may be the best choice.
Once you select your approach, you must open an investment account. There are limited options with robo-advisors, which can simplify your decision.
The leading players are Wealthsimple, Ellevest, Betterment, and Wealthfront. However, new robo-advisors come into existence regularly.
If you prefer investing on your own, then you can select from discount brokerages. While choosing a brokerage, you must compare the fees, investment types available, minimum deposit amounts, and trading platforms. Select a brokerage with a low commission and an educational platform for new investors.
Planning For Retirement
Last but not least, planning for retirement can help you to enjoy a secure, comfortable, and prosperous future.
Unfortunately, many young people often delay retirement planning until they reach middle age. However, young age is the best starting point for successful retirement planning. The earlier you start, the better your retirement savings will be.
Retirement is often the last priority for those who are not close to it. Many people put off retirement planning, thinking they will worry about it later. It is a natural human instinct to assume that everything will work out later on.
However, retirement planning requires much more than wishful thinking. What if things don’t work out in the end? What is your plan for such a possibility?
Those who put off retirement planning often must work hard during their retirement years. A carefully-thought-out retirement plan is essential for accomplishing your dreams after you stop working.
Planning for retirement assumes greater importance now due to several reasons. One important reason is that life expectancy has increased considerably over the past few decades. Since people are living longer, they need more substantial funds to pay for longer retirement years.
The average life expectancy is now close to 80 years, and many people live well beyond this average. You should, therefore, plan for a longer lifespan to be safe.
You’ll need to save higher amounts for a longer time. The earlier you start, the more successful you’ll be.
Another reason for a sound retirement plan is that you can’t work forever. Young people think that their energy and good physical and mental health can last throughout their life.
However, as time passes, a person’s energy levels slow down. One day, you’ll be too old to keep working every day.
Aside from old age, other circumstances can prevent you from working. The risk of disease and disabilities increases rapidly with rising age.
An overwhelming majority of seniors are suffering from medical conditions and disabilities. There is a high risk in today’s era; you might have to retire early due to these circumstances. But for that, you need a secure retirement plan.
If you’re delaying retirement planning, you must think about what would happen to you if you retired early. What will be your source of income then?
If you have no plan in place, you’ll become dependent on your grown-up children. If you don’t want to become a burden on your children or anyone else, plan early for your retirement.
Summary
In this article, we have covered several avenues so you can begin your quest for financial success and independence. This is basically a starting point for you, so further research. By understanding how to manage your finances, you too can live the life of your dreams.
Chris Muller is a writer for moneyunder30.com
