Personal finance management is one of the most important life skills you need to develop if you want to get far in life. It will help guide you through your finances and put you on the path to achieving your dreams and goals better. If you are trying to look for ways on how to manage your finances better, here are a few things to keep in mind.
Understand the difference between gross and net income
Once you start personal finance management for the first time, you could easily get confused with the amount of money you get to take home. As you look at your paycheck, there is a big difference between your gross and net income. Mixing one with the other can put your finances and your budget in chaos and you may come up short on your payments.
When you look into gross income, you have to understand that this does not include all your deductions yet. From taxes to other mandatory contributions, your gross pay will still go down. Once you include and take away your deductions, this now becomes your net income. This is the amount you need to be concerned about.
It is important that you use your net income when creating your budget plan. Looking at this amount also helps you manage your expectations better. Looking at your gross income can be tempting because you are looking for a nice and big amount. Remember that you still have to make deductions to get the actual amount you can work with.
List down all your expenses
Personal finance management also means that you have to create a comprehensive list of your expenses. This process helps you identify your expenses and understand it better. For one, this can help you prepare your budget better. The more you get a complete list, the lower the chances of overlooking a payment for some financial obligations.
Listing down your expenses will also make you understand your spending pattern better. Once you are able to do that, you can easily identify where you are overspending and make adjustments to save money. You need to list everything down from big payments to that convenience store runs you make every day.
It is best to do it over a course of a few weeks or even months. The longer list you have, the more you have to work with. You get to compare your expenses and see which ones are recurring frequently. Having a long list can also help you identify instances why you made a particular expense. It can be forgetting your lunch and having to buy one or even not making coffee in the morning and paying for expensive signature coffee later on.
Create goals you want to achieve in life
Personal finance management also means creating your personal and financial goals. This can help you stay on track guide your financial actions. Having a goal to aim for guides your present actions and decisions. This is because you know it can have a direct effect on what you are aiming for in the future. It can even put them in jeopardy.
Take your credit card use for example especially with the way you use it. If you keep on giving in to your impulsive buying behavior, it can affect your retirement savings. Rather than being able to save more aggressively, you end up using the money to pay for your credit card debt. In the end, you might miss your target retirement date because you have to work a few more years to make up for that credit card mistake.
If you disregard the way you spend money now, it can also have an effect on your mortgage, car, or even student loan payments. You may not realize it but the longer you pay for these big-ticket loan items, the more you are paying for interest. That is money you could have saved up for the future. You might have even invested that amount and made you money work overtime.
Constantly monitor your budget
Another important factor when you are talking about personal finance management is having a budget to work with. As mentioned earlier, you need to have a good handle on your income and expenses. Only then will you be able to create a realistic budget to follow. With that information on hand, you can then put together your budget.
Your household budget needs to be a comprehensive list of all your expenses as well as all your sources of funds. This is important because having this information on hand gives you the ability to make informed financial decisions. The first order of the day is to make sure that your income can cover all your monthly expenses.
After that, you then need to make sure that you are saving for other needs in the future. This can be your reserve fund or even for your retirement fund. You might even be saving for a purchase you need such as a new TV set or a laptop.
Check your credit score
Personal finance management also entails regularly checking on your credit standing through constant monitoring. The first thing that might come to mind is that it costs quite a bit of money to constantly request for copies of your credit report. However, there is a way to get it for free. The FCRA allows you to request for a free copy of your report from major credit reporting bureaus once every 12 months.
Doing this can help you stay on top of your finances and even catch discrepancies early on. It can be a loan that you have paid off but is still showing in your report as unpaid. You might even find small charges on your cards that you cannot recognize. This could be a start of identity theft since these crooks usually start with a small amount then move on to charging higher amounts later on.
Create an income stream from hobbies
Personal finance management also means being able to make sure that you have enough income to not only cover your expenses but help you save for the future as well. This might be a challenge early on especially when you have a lot more expenses than your income. It is not a secret that college graduates are carrying a lot of debt especially when you talk about student loans.
One thing to look into is to use your hobbies and other talents and try to earn off a little money from them. If you are a talented singer, try to look for gigs you can take on after work. There are also a few events that require a photo and video coverage so if you know your way around a camera and you have a talent for it then you can use that to earn some cash.
Personal finance management might seem a little tough especially when you are just starting out but there are ways to make it better. It will be challenging at first because you are doing everything for the first time. You will make mistakes as you try and navigate through your finances. Do not let it discourage you. The best thing you can do about it is learning from your mistakes and make sure you don’t make the same mistake twice.