For many people, personal finance is a scary and overwhelming topic. While it can be easy to get lost in the subtleties of different savings accounts or approaches to investing, financial literacy really boils down to a few key tips. Understanding these imperatives serves as the basis to taking control of one’s financial future. Below are some of the key points that serve as the bedrock of any solid personal finance strategy.
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Spend less than you earn.
Image courtesy Family O’Abe | Flickr
In many ways, the fundamental rule of personal finance is to keep track of how much you spend and make sure that it is less than what you earn. Over time, you should strive to increase the gap between monthly
expenses and monthly income, which builds a nest egg that you can invest and transform into even more money.
Individuals will never achieve financial freedom until they earn more than they save. To achieve the goal, at least one of two things must happen: either you spend less or you earn more. Of course, meeting both of these objectives means more money saved, more money invested, and more money for the future.
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Live as frugally as possible.
To some people, the thought of living frugally means living cheaply. In reality, frugality is about making smart choices that lead to financial freedom. In the end, every dollar counts, so you should think carefully about each purchase. Sometimes, it is better to buy a cheaper version of something that you do not plan to use very often. Other times, you may want to spend more for a durable version to avoid purchasing a new product too soon down the road.
Frugality means spending mindfully and thinking about each decision, even bills. Instead of paying hundreds of dollars on an electricity bill, perhaps it makes sense to invest in high-efficiency appliances. People should not make themselves miserable by stressing needlessly over every dollar, but it helps to always keep the big picture in mind.
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Learn about money management.
Once money is being saved, you need to know how to manage it wisely. Rather than spending extra money, use it to pay off high-interest debt first. Anything with an interest rate of 9 percent or more should be paid as soon as possible, which includes credit cards. You should always focus on the debt with the highest interest rate first.
Smart management also involves creating an emergency fund for when things do not go as planned. This fund avoids the need for more debt in the future. In terms of savings, you should think about college funds if you have children and are already contributing to your retirement savings. No one is too young or too old to start saving for retirement, and “maxing out” depends on many factors, such as the type of account used, tax benefits, and employer matching.
After high-interest debt and savings, all other extra money should go toward any outstanding debts with low interest. Once all debts are paid, you can begin investing extra money.
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Take steps to earn more.
Many people struggle with how to earn more money, and no universal answer exists. One piece of advice that can benefit everyone is to always keep learning. You do not necessarily need to stop work and go back to school, but try picking up new skills by reading books. Adding certifications to your resume can also help you bring in more money.
To earn more, you should constantly look for new revenue streams. If you like doing arts and crafts, perhaps you can sell products to local stores or at local farmers markets. Maybe you can pick up some fix-it jobs on your way home from work. Often, opportunities for earning more are all around you if you look.
The ambitious can start their own side businesses, especially if they have a passion for skills that are easily marketable. For example, people who love gardening can sell produce to neighbors or at local farmers’ markets. People tend to earn the most when they combine their passions with their work pursuits. When you have a passion for what you do, you will quickly outperform the competition and you can soon demand more money.
Earning money also involves networking. You should always avoid burning bridges because you never know when an old contact will approach you with a great deal. Even better, you should proactively manage your business relationships by checking in with people and grabbing coffee or a meal on occasion.
This way, people know what you are interested in and what you are doing. These people will keep you in the back of their minds, which could lead to new opportunities. For example, perhaps you decided to redo your kitchen yourself and were really impressed with the outcome. A friend might recommend you to someone else who is looking for a third-party remodeler.