All aspects of financial management are included in the term “personal finance,” including savings and investments. Budgeting, insurance, banking, investing and mortgaging are all part of financial planning, as are tax preparation and estate planning.
Personal finance is all about achieving your own financial objectives, whether that means saving for a rainy-day fund, financing a college fund for your children, or preparing for your own retirement. Your income, expenditures, living requirements and individual desires and goals all play a key role in determining how much money you have available to fulfill those needs. Becoming financially literate is essential to maximizing your income and savings, so that you can clearly differentiate between sound and shoddy financial decisions.
5 Personal Finance Tips for Everyone
Even if you don’t have a lot of money, you can still set financial goals that will give you and your household financial security and independence. Here are some of the best personal finance practices and tips.
- Plan Your Budget
Your long-term financial goals will be more likely to be realized with the help of a budget. As a starting point, the 50/30/20 budgeting approach is ideal. Here’s how it all works:
Living necessities, such as rent, utilities, groceries, and transportation, take up half (50%) of your take-home salary or net income (after deduction of taxes).
30 percent of your budget is set aside for non-essentials like eating out and shopping for new clothes. Giving to a good cause can also be included in this category.
20% of your income is invested for the future, and this can also include debt repayment and savings for retirement and emergencies.
More and more personal budgeting apps for mobile phones have made keeping track of daily expenses much simpler than it used to be.
- Establish an Emergency Fund
When it comes to saving for unexpected expenses like a major car repair, medical bills, and the cost of living if you lose your job, “paying yourself first” is essential. The advisable safety net is 3 to 6 months’ worth of living expenses. Laying aside 20% of your salary each month is generally recommended by financial experts. Fill your emergency fund to the brim, and then continue adding more funds. A down payment on a house or a retirement fund can both benefit from the extra 20% you set aside each month.
- Try to keep your debt to a minimum
It’s easy to understand: Do not spend above your earning capacity to avoid getting into debt. Indeed, some people will have to take out loans at some point, and doing so can be beneficial in some cases, such as when it allows you to purchase an asset. One of such instance is taking out a loan to purchase a home. It is possible to save money by leasing rather than outright purchasing, whether you are renting a place, a car, or even a subscribing to a computer software.
- Make Smart Use of Your Credit Cards!
Despite the fact that credit cards are notorious debt traps, most people today have at least one. However, they can be used in a variety of other ways. In addition to building your credit rating, they are a wonderful method to keep track of your spending, which could be a great aid when it comes to budgeting.
As long as you’re paying off your balance in full each month, or at the very least maintain your credit utilization ratio to a minimum, you’ll be fine (that is, keep your account balances below 30 percent of your total available credit). Credit card purchases, especially when paid for in full, make sense because of the generous rewards programs available today (like cash back). As much as you can, always pay your bills on time and resist maxing out your credit cards. One of the quickest ways to spoil your credit rating is to continuously pay your bills late or not at all (consider tip 5).
It’s also a good idea to use a debit card instead of a credit card if you want to avoid paying interests on little purchases over an extended period of time.
- Maximize Tax Deductions
Overcomplicated tax laws cause many taxpayers to underreport their income by up to thousands of dollars each year. In order to reduce your debts, enjoy your current situation, and plan for retirement, you need to maximize your tax savings.
For tax deductions and credits, you must begin each year by gathering receipts and keeping track of your expenses. There are a number of “tax organizers” available at office supply stores that have the main categories pre-labeled. Next, you’ll want to focus on taking advantage of every tax deduction and credit available, as well as choosing between the two if need be.
In a nutshell, a tax deduction decreases the portion of income that is taxed, whereas a tax credit limits the tax burden that you owe. This implies that a $900 tax credit will save you more money than a $900 tax deduction would.
Final thoughts
Do not underestimate the need to outsource when necessary. You may feel competent enough to handle your own taxes or stock portfolio, but that doesn’t necessarily mean you should. If you’ve never done this before, it might be a good idea to open a brokerage account and invest a few hundred bucks on a CPA or a financial planner at least once.
For some, it’s hard to see the positives in budgeting and planning. That’s why rewarding yourself from time to time is important. A vacation, a new purchase, or an occasional night out with your friends are all good ways to reward yourself for your hard work. You’ll get a taste of the financial freedom you’ve been striving for when you do this.
