When it comes to managing your personal finances, there is no standard plan that you need to follow. There are some rules however, which if followed, will guide you on the right path to earning, saving, spending and investing your money wisely. Here are 10 such rules of personal finance that can be of great help to you in this matter.
Create a Goal
The first rule of personal finance involves setting up a clear set of goals that will help you in the process of achieving personal financial success. These goals will define the next rule of personal finance; creating the plan
Create a roadmap aka budget
The roadmap is a step by step plan which will help you move towards your goals in a realistic manner over a period of time. The map will need to be drawn and adhered to by all those who contribute to the household income. Only then will the set financial goals be reachable within the stipulated time period. If you are unable to create the map aka budget, trust technology to come to your aid via numerous programs and apps that can perform all the calculations for you and come up with a foolproof budget that will help you reach your goals in time.
Do not overspend
This rule of personal finance is very important in today’s world where it is easy to simply borrow money from a friend, colleague or even a bank to cover expenses. The rule is simple, do not spend more than you earn. Plan your expenses according to your income and leave out anything that might create a dent in it.
Differentiate Wants and Needs
This is where the previous financial rule comes into play. When deciding on how to spend your income, attempt to differential your needs and wants first. Essential items like food, shelter, clothing, transportation, school fees, healthcare, etc. can be grouped into needs while others like travel and salon visits, etc. can be grouped into wants. While you need to spend on the ‘needs’ section on a regular basis, assess the items in the ‘wants’ section and indulge in them only if your finances permit you to do so.
Don’t forget to pay yourself first
Confused? This can be considered as a necessary act of paying yourself without considering it as a choice. For instance, you can plan for a stipulated amount of money to be set aside in a separate savings account via automatic payroll deductions every month. Not only will this allow you to save money compulsorily, but it would also reduce the temptation to give first priority to spending rather than saving.
Create an emergency fund
This could essentially be about 8 months of your net income stored away in a savings fund. This money should be kept aside only for emergency purposes and should not be touched for petty reasons like shopping or partying. Doing so will help you rely on this money to aid you during emergencies like unexpected health issues, job loss or sudden household expenses.
Start your saving plan early
There is no clear time for you to start saving, but the rule states that the sooner you start, the better. Time is your best friend when planning out your personal finances. The best time to start saving would be in your early 20s as this gives you plenty of time to accumulate wealth and alternate funds to save you in troubled times. It is also imperative that you start teaching your kids the practice of saving money at an early age itself so that they can carry it forward when they grow up.
Reduce liabilities and increase assets
This rule on personal finances involves distinguishing your liabilities from your assets and work on reducing the former while increasing the latter. In a nutshell, a liability can be considered as the money you owe (credit cards, student loans, house loans, etc.) while an asset can be considered as something you own (home, car, and savings, etc.).
Invest in Insurance
Insuring your property and belongings can save you from a potential financial catastrophe later on in your life. You may need to spend some money on the insurance. However, this is better than gambling on a financial loss that could possibly leave you bankrupt.
Never invest in things you fail to understand
Not all insurances are the same. You will need to take the time to study each one of them and educate yourself about the possible benefits and disadvantages of each of them before investing your hard earned money in one of them. Hence, it is best advised to avoid investing in things you don’t understand even if they tend or project positive returns. Invest only in things you know and understand clearly even if the returns are small and late.
Planning your personal finances is a process that needs careful planning and execution. Following these rules of personal finance will surely help you on the path to achieving your finance goals in the long run.