We have entered an age and time wherein you must practice financial management. Gone are the carefree days when we thought we were financially invincible. We cannot afford to be extravagant anymore. Now, it is more prudent to take control of our finances and monitor where every penny goes to.
This is where learning the basics of personal finance becomes important. Not only should you learn how to manage your money, you have to learn how to do it wisely. It may seem like a daunting task but once you have started, it should be easier to follow through.
Organize your money
Begin by organizing your money. You cannot hope to take control of something when it is all over the place. That can be quite difficult to accomplish and sooner or later, something will slip past you. That being said, you know that you need to incorporate a budget in your life.
Budgeting is an integral part of financial management. To help you create a realistic budget and in effect, organize your finances, here are the steps that you should follow.
Define your financial goals. You want to begin with a goal so that your budget will have a purpose other than to help you live within your means. It can be something that you want to buy in the future or saving up for your retirement. It can even be getting out of debt. This will help you in prioritizing where your money should go to – which is an important part of budgeting.
Identify your income. List all your income- making sure that you will only consider the net amount. Include any biannual or quarterly income that you get. As long as it comes regularly, put it in this list. But take extra care to be conservative in your income estimate. That way, you lessen the chances of you going over budget.
List your expenses. After your income, list every detail of your spending. Feel free to take as long as a month to accomplish this. That way, your monthly budget can be based on realistic figures.
Get your bottomline. Once you have accomplished all three, get your bottomline by deducting the expenses from the income. You need to have a positive figure here. If not, you have to go back to your expenses list and see where you can lessen your spending.
So far, you have just been practicing personal financial management with the four steps we just mentioned. If you want to be wise about it, what you need to do is add the task we have below.
Add the necessary expenses that will help you meet the goals you have set in the first step. It can be your savings or debt payments. This has to be placed on top of your list so you are sure that it will always be funded before you get lost in the myriad expenses that you have on your list.
Incorporating your personal and financial goals will help make your budget all the more worthwhile. It will make it easy for you to follow any changes that it imposes on you.
If you are having trouble with the budget, you can always get a template online. There are personal finance software programs that can provide you with the tools to help you organize your money. Check out the best software ranked by TopTenReviews.com. There are also free budget templates that you can use. An article in About.com listed a couple of templates that you can download for free.
Make smart debt choices
Once you have organized your finances, there is another thing that you need to do and it involves debt. A lot of us committed various financial mistakes that led us to some form of credit obligation. You want to get rid of that or at the very least, keep it controlled.
Your debt is a serious financial hurdle that you have to overcome and fortunately, there are several debt relief options that you can use to help you solve your credit woes. But, again, if you want to be wise about it, you have to choose the one that fits your type of debt, financial capabilities and your financial goals.
Here are your various options:
Debt consolidation. This program provides you with a single and lower monthly payment contribution. There is no debt reduction here so your credit score will not be harmed. The lower contribution is possible because you will stretch your balance over a longer payment term. There are two ways to do this: debt consolidation loan and debt management.
Debt settlement. This is the program that can give you debt reduction. You will convince your creditor that you are in a financial crisis by defaulting on your payments. That will ruin your credit score. However, if you are successful, you can make your creditor agree to let you pay a portion of your debt and have the rest forgiven.
While it is a good idea to eliminate debt, you need also have to consider that we live in a society that requires credit. Think credit score. You cannot get a mortgage and you can even have limited employment opportunities if you have a low score. Because of this, eliminating debt entirely may not be the wisest thing to do – especially when you are trying to grow your money.
It may seem contradicting but here’s the thing: if you make smart choices about your debt, you don’t have to worry about the destructive effects that it can have on your future. For instance, if you use your credit card and you pay the full balance before the grace period is over, you don’t have to pay any interest and it will be life paying in cash. That is an example of proper credit card use that will keep your credit score high.
Also, when you find yourself facing the prospect of debt because you want to buy a home for instance, why not invest in a rental place while you are at it? If you are qualified to loan $500,000, use the $300,000 for your own home then look for a smaller home that costs $200,000 and have it rented. That way, your debt allowed you to earn extra money.
There is more to learn when it comes to handling your finances. To further your research about personal financial management, watch this video.