Financial Planning 101: Easy Tips To Manage Your Finances Better
5 steps to take control of your finances.
The moment where you decide to start managing your finances for the first time is life-changing. You are choosing to start building a better future for yourself and the people you love. Today, we want to make that process as easy as possible for you. Here are the first five steps you need to take to start managing your finances.
Step 1: Examine Your Finances
Before you can take control of your finances you need to understand them. So, the first thing you need to do is a full audit of your finances. You want to know where your money is going and how much you have coming in.
Work out how much you are earning each month. How much do you have to spend on your rent or mortgage? How much you are spending on insurance premiums and other non-negotiables like energy bills. Then work out how much you spend on average on groceries.
Next, take a look at the monthly payments going out of your account. Make sure you want all of the subscriptions you are subscribed to. Cancel some you don’t need if you are trying to save money. Gathering this data will give you a good idea of how much “unassigned” cash you will have each month.
It may be that you are spending all of this money each month even though you wish you were saving. Once you notice this, you can start to make more conscious choices about what you do with your money. This information will all be very useful in the next two steps.
Step 2: Set Financial Goals
Now it’s time for some blue-sky thinking. What are your future goals? Do you want to own your own car? Do you want to buy a house? Do you want to go to college or pay off your student loans? Do you want to start saving for retirement?
What are your short-term goals? Do you want to be debt-free? Do you want to pay family members back? Do you want to be able to stress less about your finances every month? Then look at the things you want and rank them in order of importance and urgency. Set up saving pots for each of these goals. The first step to achieving your goals is to work out what they are and to make a plan of how to get there.
Step 3: Make A Budget
Now that you know how much money you are making and what your goals are, it’s time to put plans into place that will move you forward. You will already know how much money you spend on non-negotiable payments each month and how much “assigned” money you have leftover.
Now, look at that money and decide how much of it you are going to put towards your financial goals and how much you are going to have as spending money. You can always add any leftover spending money to your savings at the end of the month.
Set aside some money as a “Progress Fund”, you should put this money towards achieving steps 4 and 5. You will need to decide how much money you want to put into your savings pots. You may choose to split the money evenly between multiple pots. Or if you have a big long-term goal – like buying a house – you might choose to put more into that pot each month.
If you earn $2000 a month:
$1400 on rent, bills, insurance, and food (non-negotiable)
$600 leftover (unassigned)
Take the $600 and decide what you want to put it towards.
$200 towards your Progress Fund (this would mean $100 for your extra debt payments and $100 for your Emergency Fund)
$200 towards saving for a house
$200 spending money*
*With any leftover spending money going into your Emergency Fund
If you want to invest in the future then you should only ever use money from your unassigned category – you should only invest money you can afford to lose.
Step 4: Start Paying Off Your Debts
If you have multiple personal loans then you should take out a personal loan large enough to consolidate (pay off) all your debts. You will save money by only paying one set of payments and interest each month.
After this, make a list of all your debts, in descending order of the amount owed. Make all of your payments each month. And add half your Progress Fund into the smallest debt on top of that. Once you have paid off the first debt, start paying your Progress Fund into the next biggest loans, but all pay the money you would have been paying into that
Step 5: Put Together An Emergency Fund
With the rest of your Progress Fund, start building an emergency fund. This is a fund you can dip into in the future if you lose your job. Your aim for this fund should be to have enough money in it to cover all of your expenses for 3 months.
Once you have this fund, you know even if something does go wrong, you have a three-month buffer when it comes to rent and food, which will take away a lot of worries.
- Set up a savings account with limited access to earn higher interests on your payments.
- If you struggle to not spend all the money in your account each month, set up automatic payments as soon as your paycheck comes in. The money for your bills and savings will be moved somewhere else so you can’t spend them.
- Learn more about your credit score and how to improve it – this will help you to achieve more of your financial goals in the long run.
- When you are trying to pay off personal debt, try to get into the habit of paying in cash or with your debit card – give your credit card a rest when you can.