Managing Money: A Quick Personal Finance Guide
Managing money is something we all struggle with and it’s something few of us learn to do. There is no personal finance guide that is handed out to consumers once you enter the real world. Most of us are so daunted by the task of managing money that we simply do nothing and instead let our gut or emotions dictate our personal finances. Doing nothing, however, is the biggest mistake you can make for financial planning. Managing money is easier thank you think – there are only a few basic principles that you need to learn to keep yourself out of debt and on the road to your financial goals.
The Number One Rule for Personal Finance: Spend Less Than You Earn
Spend less than you earn – seems obvious, right? But it’s the personal finance rule that’s broken more than any other. The reality is that most people have no idea what they are spending or even how much they are earning. Sure, you know what your salary or your hourly wage is, but how much net income do you have after taxes, utilities, rent, gas and other monthly expenses?
If you don’t gain an awareness over your income and expenses, you’ll never reach your goals. You may even find yourself blindsided by debt. Take the time to make a simple budget by recording all of your monthly expenses, including your credit card bills. Subtract that from your income and see if it’s a negative or positive number. If that number shows up red on your spreadsheet, then you’ve already made a life changing revelation. If necessary, adjust your lifestyle in order to bring that number back into the black.
Pay Off Debt Before You Invest
Another common mistake in money managing – failing to pay off high interest debt early. Again, all this takes is some basic arithmetic to figure out: if you have $5,000 in credit card debt that racks up 17% in interest every month, it’s silly to try to invest money for a return. The average index fund gets about 7% (when things are good), so you’re far better off paying down your high interest debt before you even dream of trying to build investments. Of course, you still want to have some liquid assets (a savings or CD account) in case of emergency. But the fastest way to build wealth is to stop losing money on finance charges.
Diversify, Diversify, Diversify
Once you do reach the point where you can safely invest, it’s imperative that you avoid putting all your eggs in one basket. There are easy ways to do this – you can buy into an index fund or a mutual fund or have a certified financial planner devise a plan for you. No matter what you do, you’ll want to split your assets between several different strategies, just in case one is the next big bubble. Don’t sink your life savings into real estate and don’t attempt to ride the next wave. Your best bet is to hold a variety of reliable, though perhaps conservative investments and avoid the volatile world of day trading and trend chasing.
This personal finance guide is just a brief introduction to the things you should be thinking about in order to get your finances on track. Money managing isn’t something you can do all in one day, nor is it something that should consume your every waking hour. Think of money managing like taking care of a plant. It’ll thrive and grow on its own, as long as you know how much water and sunlight to give it. But if you ignore it, it’s bound to die on you.
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