Money doesn’t grow on trees, but it does make the world go round. It’s also the root of all evil and your ticket to lasting peace of mind. Throughout our lives, we’re constantly fed so much conflicting information about money that our attitudes to it can become confused.
This is why demystifying personal finance and learning how to manage your money is a skill that can transform your life. From short-term goals like getting those new curtains you love to buying a dream home and even planning for your retirement, effective money management can empower you to take control of your life.
Whether you’re a scrimper, a saver, or a spender, there are always improvements to be made in the way you handle your cash. In this guide, we’ll be unraveling personal finance and breaking money management down into actionable steps. With these strategies and techniques, you’ll be able to maximize your money and make the purchases you want. Let’s dive in…
Why Is Personal Finance So Important?
Good personal finance can have a profound impact on your life. It offers you a variety of benefits, including:
- Financial freedom - Without financial constraints, you’ll be able to make small purchases that fulfill you, and achieve your financial dreams like purchasing property.
- Financial awareness - With a clear picture of your financial situation in your head at all times, you’ll be able to recognize when a purchase will serve you or when you should cool down on your spending.
- Peace of mind - Around 90% of Americans cite money as a stress factor in their lives. A solid financial foundation can eliminate this stress and offer you peace of mind.
- Goal achievement - Personal finance will lead you to success, helping you achieve life goals like owning a home, travelling the world, or maintaining your Pokemon card collection.
- Debt management - Financial management will allow you to strategically pay down loans and never take another out.
- Emergency and rainy day funds - Life often throws unexpected situations at us, but with money management skills you’ll be able to save enough to adapt to financial emergencies.
It’s never too early or too late to get a hold of your financial situation. Once you understand your spending habits and begin financial planning, you’ll have a foundation to invest and generate more income. But, gathering the skills necessary will take time and experience, so let’s dive a little deeper.
Setting Your Financial Goals
The very first step to taking control of your finances is giving yourself something to work towards. A concrete financial goal will motivate you to make spending and saving decisions accordingly and stay on the road to success.
You can set both long-term and short-term goals, but make sure they are specific. If it’s a certain purchase you want to make, include the price and how long you have to fulfill this objective. It’s worth writing these goals down somewhere that you’ll see regularly.
Once you’ve decided on your goals, it’s time to plan how you’ll achieve them.
Budgeting For Success
Budgeting is to personal finance as a compass is to a navigator. It will be your best tool, a necessary tool, and it will help you plan your next steps to achieve your goals. However, there are many different ways to budget. The type of budgeting that works well for you will have a lot to do with your attitudes toward money.
Before you select a budgeting method, it’s worth asking yourself:
- What is my current financial situation? How did I get here?
- How often do I treat myself? How often can I afford to treat myself?
- If I had unlimited money, would I still carefully consider my purchases?
- Am I prepared to sacrifice smaller purchases in favor of large ones?
- Can I keep up habits or do I need incentives?
- What tools and skills can I use to record my spending and savings?
The answers you recorded to these questions will help you determine what you need from a budget. For example, if you answered that you’d track your progress on a spreadsheet, you can opt for a more traditional budget that breaks down exact income and outgoings every month. If you answered that you like to treat yourself, you should opt for a budget that allows you to make personal purchases often. This will help you stay on track without feeling like you’re limiting yourself.
Budgeting is not a one-size-fits-all situation, and it’s important to select a budgeting strategy that suits your money mindset and lifestyle. So, without further ado, here are some popular budgeting strategies that will help maximize your money:
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50/30/20 Budget
This budgeting method is perfect for those who like to spend a little extra on themselves and don’t mind waiting a tad longer to achieve their goals. You’ll need a good idea of how much you earn every month, and you’ll need to keep your optional bills like subscription services to a minimum.
Essentially, using your total monthly income, you allocate 50% of it to your needs (food, toiletries, rent, insurance, bills), 30% of it to your wants (gifts, activities), and 20% of it to your savings. This budgeting system is regimented, so if your needs change from one month to another, this may not be a good fit for you.
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Zero-Base Budget
Again, this budget is a great choice if you know how much you’ll be earning every month and when your bills are charged to your account. It also gives you a lot of freedom to spend your remaining cash however you want, but it doesn’t leave much room for emergency funding. It also requires slightly more willpower than other budgeting methods if you want to save.
The zero-base budget means you’ll return to having $0 available at the end of every month. After your bills and necessary payments have left your account, you can allocate the remaining funds to activities, small purchases, savings, and subscriptions as you please. You can plan how you’ll spend at the start of the month, or decide which purchases you’ll make after your outgoings have left your account.
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Pay Yourself First
This budgeting strategy prioritizes saving, so it’s perfect if you are working toward a large purchase. It’s also a great choice if you don’t want to list out exact amounts for spending. However, it does mean you’ll have to forgo smaller purchases in the meantime.
The pay-yourself-first budget means you set aside a specific amount from your monthly income for your savings or debt repayment. The rest of your income is then used for bills and necessary expenses such as food.
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Envelope Budget
The envelope budget offers a lot of freedom for how you spend your monthly income. Because it uses cash, you’ll also be able to get precise and go as in-depth with what you spend your money on as suits you. You will need to know precisely how much you spend on bills each month and the exact dates that these charges leave your account.
You’ll have an envelope for each of your outgoings after your bills have left your account. One may be a grocery shopping envelope, while others may be allocated to personal purchases, car funds, holiday savings, emergency savings, presents for your kids, etc. At the start of your month, you allocate cash amounts to these envelopes. When you go food shopping, you’ll bring along your grocery shopping envelope. The savings envelopes will likely be filled at the end of the month with your remaining cash and can be placed somewhere for safekeeping.
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‘No’ Budget
Finally, this budgeting method is great for those who have significant loan and debt repayments that need to be paid each month. You don’t need to go too in-depth with how much money is allocated to specific areas. All you need to focus on is your necessary outgoings.
Set reminders on your phone and calendar for when your bills and repayments leave your account. Time your food, clothing, and toiletries purchases around these repayments and try and keep these expenses the same every month. At the end of the month, if you have money left you can spend it how you please. However, during the month, you’ll need to tell yourself ‘no’ if you want to make unnecessary purchases. Once your debts are paid off, you can choose a different budgeting method from those listed above.
Income Generation
Every budgeting method hinges on your monthly income. So, to maximize your money, it’s worth looking at how you generate income and finding ways to increase this amount. Here are some approaches to consider:
Additional Income Streams - More work equals more money, so if you have the time, finding a second job will be worth it in the long run. Consulting and freelancing work are good options, as they’ll allow you to set prices that fit with your goals.
Passive Income - Depending on your lifestyle, taking on a second job may not be possible. This is why many people opt for passive income streams. However, passive income is misleading, as these streams often take a lot of work and will need to be factored into your budget. For example, renting out property will require you to purchase that property, which in turn will require very strict budgeting.
Monetizing Your Hobbies - Another way to generate income, if you don’t have time to get a second job or the funds needed to set up passive income streams, is to monetize your hobbies. If you enjoy scrapbooking, consider making cards or picture frames that you can sell. If you spend a lot of time reading, a successful book review blog can be monetized.
Investments and Savings - If you’ve been budgeting for a while and have some savings set aside, consider moving these to a specialized account with a favorable interest rate. Or, why not invest in stocks, bonds, or mutual funds? Successful investing is a skill all of its own, so be sure to do your research before you put your money into investment opportunities. Or, invest in yourself and take courses that will allow you to set up a second income stream, or invest in professional financial help from an advisor.
Many of these strategies for income generation will require you to set aside more of your money. For example, if you’re setting up and running your own small business from home until your business is self-sufficient enough to warrant its own budget, your expenses will need to come out of your income. Remember to factor these expenses into your chosen budgeting method.
Financial Tools and Resources
Finally, personal finance is an industry all of its own, and there are countless tools and resources out there that you can use to your benefit. You should consider making use of:
Banking Apps - If you have an account with a certain bank, these apps will be free to use. They are invaluable in recording your monthly income and outgoings, and many will even allow you to set up savings accounts in-app.
Budgeting Apps - If you struggle to budget on paper or use your resources, budgeting apps can be a huge help. They’ll prompt you when you need to input income and outgoings information and will do the rest for you. Most of them will charge a subscription fee, so make sure you can afford this.
Financial Calculators - If you’re working toward a large purchase like a house, financial calculators will let you know exactly how much you need to save. Bankrate and NerdWallet provide mortgage calculators, retirement calculators, and debt calculators.
Credit Monitoring Services - After paying off loans and debt, and when looking to make big purchases, it’s worth monitoring your credit score. Services such as Credit Karma and Experian offer free ways to check your credit score and advice to get it in the green.
Financial Education Sites - Investopedia, The Balance, and The Motley Fool are all sites that provide free financial education through articles and guides from experts. Invest in yourself by doing the research and teaching yourself important aspects of personal finance.
Community and Support Groups - Everyone struggles with money at one point or another, so having the support of a group within your community can make a huge difference to the way you view your income. Groups like these can also offer opportunities like housing cooperatives.
Conclusion
Money will always play a crucial role in our lives, and learning the skills necessary to manage it takes time and effort. Personal finance is essential to managing your finances and achieving lasting peace of mind.
By setting clear goals, implementing a budgeting strategy that works for you, generating further income, and taking advantage of financial resources, you can pave the way to a prosperous financial future for yourself and your family, no matter where you are on life’s journey.
Invest in yourself by committing to your personal finance and you can maximize your money in simple ways. Financial well-being is within your reach, so apply what you’ve learned here and you’ll already be halfway to success. Good luck!
Sources
- https://www.annuity.org/personal-finance/
- https://www.investopedia.com/terms/p/personalfinance.asp
- https://www.cnbc.com/select/why-americans-are-stressed-about-money/
- https://www.ramseysolutions.com/personal-growth/setting-financial-goals
- https://www.nerdwallet.com/article/finance/how-to-set-financial-goals
- https://www.lendingtree.com/student/simple-budget/
- https://www.experian.com/blogs/ask-experian/types-of-budget-plans/
- https://www.moneynuggets.co.uk/different-personal-budgeting-methods/
- https://www.bankrate.com/investing/passive-income-ideas/
- https://www.moneysavingexpert.com/family/boost-your-income/
- https://www.indeed.com/career-advice/starting-new-job/how-increase-income
- https://www.stepchange.org/debt-info/your-financial-situation/saving-money-and-increasing-income.aspx
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Weekend Growth
Blogging is actually my side hustle and I am also engaged in affiliate marketing perfect in connecting my content. I am also planning to invest soon.