Five Rules to Improve Your Financial Health

The phrase “personal finance” refers to the way you manage your finances and plan your financial future. Every financial decision and actions impact upon your overall financial wellbeing. We’re often guided by specific guidelines like “don’t buy a house that costs more than two-and-a-half years’ worth of income” or “you should always save at least 10% of your income toward retirement.”

Although many of these sayings have been proven to be effective over time and are useful but it’s also important to think about what we need to be doing in general, to improve our financial health and lifestyle. In this article, we will discuss five basic personal finance guidelines that will aid you in getting on the right track to meet your financial goals.

KEY TAKEAWAYS

  • “Personal finance” is too often a word which causes people to avoid planning, which could result in poor choices and bad outcomes.
  • Make time to plan your income in relation to. expenses, so that you are able to spend your money within your budget and be able to manage your lifestyle expectations.
  • In addition to planning for the future begin putting money aside today to save for goals such as retirement, leisure and for emergency reasons.

1. Do the Math–Net Worth and Personal Budgets

Money is deposited, and money is taken out. For many, this is as far as they can get in the area of financial matters. Instead of neglecting your finances and leaving the rest up to fate, just a little bit of number crunching may assist you in assessing your financial condition and help you figure out the best way you can reach your long- and short-term financial goals.

To begin is to estimate what is your net worth–the difference between what you have and the amount you have to pay. To determine how much you are worth Begin by making an inventory of all your possessions (what you have) as well as your liabilities (what you have to pay). Add the liabilities to the assets to calculate your net worth figure.

Your net worth is a representation of where you’re financially at the momentin time, and it’s normal for it to fluctuate as time passes. The calculation of your net worth over a period of time is helpful but the most benefit comes from doing this calculation on a frequent basis (at at least once a year). Monitoring how much you’ve earned over the years will allow you to assess your improvement, highlight your accomplishments and highlight areas in need of improvements.

It is equally important to create an individual planning for your spending or budget. It is created on a monthly or yearly basis, the personal budget is an essential financial tool as it will assist you in:

  • Budget for your expenses
  • Reduce or eliminate expenses
  • Save the money for goals in the future.
  • Make wise spending decisions
  • Prepare for the unexpected
  • Prioritize your spending and savings and make sure you save

There are many ways of making a budget for your personal however, all of them involve projections of income and expenses. The categories of income and expenses that you put within your financial plan will vary based on your specific situation and will be modified as time passes. The most common income categories are:

  • Alimony
  • Bonuses
  • Child support
  • Disability benefits
  • Dividends and interest
  • Royalties and rents
  • Retirement Income
  • Salaries/wages
  • Social security
  • Tips

General categories of expense include:

  • Childcare/eldercare
  • Debt payments (car loan, student loan, credit card)
  • Education (tuition, daycare, books, supplies)
  • Leisure and entertainment (sports books, hobbies movies, DVDs and streaming services)
  • Food (groceries, dining out)
  • Donations (birthdays, holidays and charitable contributions)
  • Housing (mortgage or rental or maintenance)
  • Insurance (health, auto, home/renters,)
  • Health Care and Medical (doctors and dentists prescription medications, as well as other expenses that are not known)
  • Private (clothing or hair-care products, workout professional dues)
  • Savings (retirement or education savings, emergency fund, or other objectives such as taking a vacation)
  • Special events (weddings or anniversaries, graduation and bar/bat mitzvah)
  • Transportation (gas taxis parking, tolls)
  • Utilities (phone electric, water, phone gas, cell phone, internet, cable)

After you’ve done the right projections then subtract your expenses from your earnings. If you have funds that is left, you’ll have surplus and have the option of deciding how to use or save the funds. If your expenses are higher than the amount you earn you’ll have adjust your budget either by increasing your earnings (adding additional hours to work or taking on an additional job) or through reducing the amount of money you spend.

To fully know where you stand financiallyand determine how you can get to the position you’d like to be, you must do the math: Determine your net worth as well as a personal budget on a daily basis. It may sound evident to many however, the inability of people to create and adhere to a precise budget is the primary cause of overspending and excessive debt.

The majority of people who earn more money will end up spending more money, a dangerous phenomenon referred to by the term “lifestyle inflation.”

2. Recognize and Manage Lifestyle Inflation

A majority of people spend more money when you have an extra amount of money. As individuals progress in their career and receive higher pay, there is likely to be an growth in expenditure, a phenomenon referred to by the term ” lifestyle inflation.” While you may be able to pay for your expenses, lifestyle inflation can cause harm in the end as it restricts the ability of you to build wealth. Every dollar you invest now will mean less money later on and in retirement.

One of the primary reason why people let lifestyle inflation to undermine their financial situation is the desire to stay in line with Joneses. It’s not unusual for people to feel pressured to be in line with their coworkers’ and friends their spending habits. If your colleagues have BMWs or vacation in exclusive resorts and dine at expensive eateries, you may be pressured to emulate them. It’s easy to forget is that often those who are Joneses are actually paying off many debts–over several decades to keep their glam appearance. Despite their lavish “glow”–the yacht, the expensive automobiles, the lavish vacations, the private school for the children, the Joneses could be living paycheck-to-paycheck and aren’t saving a dime for retirement.

When your personal and professional situation changes in time, some rises in expenditure are normal. You may need to update your wardrobe to be able to dress for your new job or when your family expands and you have children, you may require an additional bedroom in your home. In addition, with increasing tasks in your job. You may decide it’s a good idea hiring someone to mow your lawn or clean up the home, allowing you more time to spend time with your family and friends while improving your living conditions.

“You may know what you need/But to get what you want/Better see that you keep what you have.” — Stephen Sondheim, from “Into the Woods.”

3. Be aware of Needs vs. Wants and Spend Mindfully

If you don’t have an unlimitable amount of money It’s important to pay attention to the distinction in “needs” and “wants,” so that you can make better choices when it comes to spending. “Needs” are the things you must to have to live such as shelter, food transport, healthcare and a decent quantity of clothes (many people view savings as a necessity, whether that’s percentage of earnings or whatever amount they are able to put aside every month). However desires are things that you’d like to own but aren’t essential for survival.

It can be difficult to label expenditures accurately as either wants or needs and, for many, the lines blur from one to the other. If this happens it’s easy to justify the purchase that isn’t necessary or expensive as a necessity. The car is an excellent illustration. You’ll need a car in order to commute to work and also to get your children to school. You’re looking for the top-of-the-line SUV that is more than an affordable car (and is more expensive in fuel). You can try calling the SUV as a “need” because you do actually require a car. However, it’s still a desire. The price difference between a cheaper car and a luxury SUV is money was not yours to spend.

Your needs should be given the top spot in your budget for personal expenses. Once your requirements have been satisfied, can you put any money that is discretionary to needs. Also, if you have some surplus funds each week or every month after you’ve paid for what you truly require, you don’t need to spend it all.

4. Start Saving Early

It’s said there’s no time to begin saving to retire. It’s true (technically) however the earlier you begin your savings, more secure you’ll be when you retire. This is due to the potential of compounding–what Albert Einstein called the “eighth wonder of the world.”

Compounding is the process of reinvesting profits, and it’s the most effective over the course of time. The longer the time that earnings are reinvested more valuable the investment, as well as the more the return are likely to (hypothetically) become.

To show the importance of beginning early suppose you wish to save $1,000,000 before you reach 60. If you begin saving money at the age of 20 years old, you’d need to put in $655.30 each month — a total of $314,544 over the span of 40 years, to be millionaire by the time you reach 60. If you had waited until you reached 40, your contribution will rise by $2,432.89–a sum of 583,894 in 20 years. If you wait until you’re 50, you’d need to make $6,439.88 every month. That’s $772,786 in the course of 10 years. (These figures are based upon an average investment of 5 percent, with there’s no initial investment. Be aware that they are meant to be used for illustration purposes only and do not consider actual tax returns, return on investment or any other variables).

The earlier you begin the earlier you begin, the easier it will be to meet your financial goals over the long term. You’ll need to save less every month, and pay less overall to reach the same goal in the future.

A stash of cash to hand out in the event emergency financial situations is essential for a sound financial plan.

5. Build and Maintain an Emergency Fund

The term “emergency fund” refers to an an emergency savings fund is precisely what it says it’s money that’s been saved for use in emergencies. The funds are intended to pay for expenses that would normally be part of your budget, like car repairs or an emergency visit for a visit to the dentist. The fund can also assist you to cover your normal expenses in the event that your income is cut off; for instance, when an injury or illness prevents you from working, or if it is necessary to lose work.

Although the norm is to put aside up to three months from living costs in an emergency savings account, the sad fact is that this amount will not be enough to cover the amount most people require to cover an enormous expense or cover a decline in income. In today’s uncertain economy the majority of people should strive to save at least six months worth of living expenses. If they can, more. Making this a regular expense in your budget is the most effective way to make sure you’re saving for the unexpected and not spending the money in a reckless manner.

Remember that creating the emergency backup plan is a continuous task. It is likely that, once the fund is able to be set up, you’ll need it to cover something. Instead of getting depressed over this, rejoice that you are financially prepared and begin the process of making the money again.

The Bottom Line

Personal finance guidelines are a great tool for getting financial success. But, it’s essential to look at the bigger picture and develop habits that will help you make better financial decisions that will result in greater financial wellness. If you’re not able to establish good habits for your overall financial health it can be difficult to adhere to specific adages like “never withdraw more than 4% a year to make sure your retirement lasts” or “save 20 times your gross income for a comfortable retirement.”
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