Beyond the Basics of Personal Financial Management

Financial management is not my forte.

Although I want to save money I end up spending all of it somehow. Till date, I have no savings. All my money goes in dining out with friends in fancy restaurants or buying expensive clothes. Since childhood, I have been hearing words like a piggy bank, bank account, and savings. Teachers used to promote the whole ‘saving for the future’ concept. The whole idea used to fascinate me but somehow I have failed to implement all those lessons taught in my real life. My savings are as scant as Xfinity Triple Play Deals in my area. But this is not something I should be proud of.

I would encourage all the young people to start saving as early as possible. Here are a couple of things that I would like all of you to start acting upon.

Spend Less Than You Earn

The gap between your earning and spending should be as big as you can manage it to be. For instance, you earn $ 1,000 a month and spend $ 1,100, where will that leave you? Let me tell you. The amount that you overspend will eventually haunt you as a piled up debt. And it is not easy to get rid of the debts, mark my word for it. People end up with conditions like depression because of their inability to pay-off the piled amount. However, spending the exact amount of money that you have earned and not saving a single cent is not a good idea either. If you do not save, where will you get money from in case of an emergency? Whom will you resort to? Hence, it is recommended and is preferable that you spend less than you earn. Try to keep the gap as big as possible. You will thank me later.

Work Hard Towards Achieving a Goal

Who doesn’t like a YSL bag or a Rolex watch? While everyone can’t afford to buy luxurious items very often, buying one or two expensive things causes no harm. But you cannot invest in a pricey item without money. And for that to happen, you need to save. Set a goal. Tell yourself that you need to buy a pair of expensive heels or designer shades. Then start working towards achieving the ‘goal.’ Start saving on a monthly basis according to the price of the item. This will not only stop you from over-spending but will also instill in you a habit to live on a limited budget.

If you think it is hard to decide as to the exact amount that you should save, here are a couple of rules to go by.

50-20-30 Rule

If you find yourself confused about the *exact* amount that you should be saving or spending, you are not alone. As simple as it may sound, personal financial management is not an easy task at all. So the 50-20-30 rule states that 50% of your earnings should go towards your household expenses. These include your living expenses (rent maybe) and groceries. 20% of your earnings, according to the rule should go to the piggy bank and the remaining 30% should be spent on living ‘The Life.’ I mean you have the liberty to spend it on traveling or dining out or shopping. That is upon your discretion. However, you must not forget that this is not a hard and fast rule. Following it can give you a direction but you can always mold it according to the circumstances, your age, and your earnings.

20-4-10 Rule

This rule would be useful for anyone who is planning to buy a car. According to this rule, 20% of the car price should be paid as a down payment. You can always pay more but don’t make a down payment that is below 20% of the price of the vehicle. The ‘4’ part in the rule implies that you should leas the car for not more than four years. Although, the maximum tenure is seven years, try sticking to four. And the ‘10’ means that ten percent of your take-home salary should go towards the loan that you will pay off.

Look for Alternatives

Whenever you can, look for cheap alternatives for a product that you are buying. I do not mean that you should do this every time. But this implies to more expensive, luxury items. If you believe that there is a less expensive alternative to a product, invest in that. However, do not compromise on the quality. Once you start developing the habit of saving, you will feel so good about yourself. It will seem tough in the beginning but it will help you in the long run. I, myself, found it as hard to choose between the saving vs spending option as deciding amongst xfinity vs centurylink. But now that I see, I have been able to lease a car and am saving towards buying a home (which is a big achievement).