Personal finance is a wide topic, and it can be challenging to decide who to listen to in regards to the issue. But, with varying opinions about the topic, one thing should remain constant, your finance rules. Why is this important?
Finance is an intimidating and overwhelming topic. At times you’ll feel you need a financial advisor, an accountant, and others to help you manage your money. But what if you can’t afford all these professionals? Does it mean you’ll misspend your money?
Although managing finances can be a scary ordeal, you can with several personal finance rules.
Which Are These Financial Rules?
1. Spend less than you earn
Regardless of what you make, the little you save is your wealth. Ponder on this. You spend your time working for a company that pays you a certain amount of money. Unquestionably, the company makes more than you earn and that its profit. On the other side, you have to spend your income on bills. Notably, you’ll be paying someone else.
Although you’ll have paid your bills, there is nothing in your pockets. You basically work to settle bills and fund your lifestyle.
So, learn to live within your means and ensure you save at least 10% because, ideally, that is your wealth.
2. Pay your debt starting with one with the highest rate
When it comes to personal finance rule to live by, debt is a debt. There is nothing as good or bad debt, the truth is, you own someone some cash in exchange of interest. Having debt is an expense itself because it requires you to pay the interest every month.
Debt payment drains your income, and it can be stressing for most people. Unfortunately, the longer you take to recover from the loan, the more interest you’ll pay. But when you settle the loan, you can direct the money to an investment. Start with a credit card, personal and car loans which ideally have higher interest rates.
3. Purchase what you can afford
Buying something doesn’t mean you’ll become financially stable. Instead, it means you have more financial responsibility. For instance, if you buy a car, you’ll be spending more on fuel or gas. It’s something you need to budget for. Also, if you can’t buy something twice, then it means you can’t afford it.
Sometimes, not purchasing something is being financially responsible. However, if you must buy an item, ask yourself the following questions:
- Are you comfortable depositing down payment?
- How much research have you conducted?
- If it’s a house, does the mortgage cost less than 30% of your money?
- Do you have a budget?
- Do you have plans for unforeseen repairs and other monthly costs?
4. Organize your finances
This is one of the most essential financial rules. You can’t manage your finances if you don’t know the amount that’s coming in and going out. You need to know your financial habits to change things. How much do you spend in a day or a month? Is the service you pay necessary?
When you organize your finances, you realize where you’re spending more and which area you’re forgetting. It provides you with a room to spend on the essential thing as you move to less critical spending.
5. Set goals
Those who set goals have higher chances of achieving them than those who don’t. So, set a goal and follow it religiously. Remember, the goal you’re setting is for personal advantage. However, be flexible.
Thing changes and you might not achieve your goals. To avoid beating yourself down, be flexible, and change the target to a more reasonable one. Nonetheless, be accountable.
6. Have an emergency fund
Besides your monthly savings, you can have an emergency fund. This is a fund you use in case you’re caught up by an emergency. This ensures that you don’t deplete your savings or incur debt to cover the emergency.
Ideally, you should save 10% of your income. Why? There will come a time when you won’t be able to go to work because of retirement, old age or illness, and disability. You should, therefore, have enough to carry you through the period you’ll not be working. Saving can also mean investing your 10% savings. A financial advisor will advise you on the best platform to put your money.
8. Get a life insurance policy
After your demise, your family will thank you for putting aside a life insurance policy. It funds almost everything before your family gets back to their feet following grief. Aim for six times your current household income.
9. Your credit score
Watch on what you’re spending on your credit card because it will act as a guarantee when it comes to getting a loan. Consider having fewer credit cards, repaying your loans sooner, and having a better credit to debt ratio.
10. Tax breaks
Filing taxes on your own might prevent you from taking advantage of tax reduction. Often, it’s not your fault. It’s just that filing tax is a complex task and, therefore, advisable to seek assistance. So, save receipts and track expenditures.
Check whether you have tax deduction and tax credit availability. Tax deduction means the amount you’re usually taxed on will be reduced. Tax credit minimizes the amount of tax you pay. If you don’t understand, carry along with your receipt to a CPA certified tax advisor.
The truth is, you might not implement all the rules above at once. But you can pick a few that are applicable to you before trying the rest.