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Still struggling with your finances? Still feeling insecure? From this article, you will learn the foundations of managing money. Use those rules every time you don’t know if you’re making the right financial decision. They will save you tons of problems.
You can find lots of saving money tips on the Internet. Some will save you thousands, some hundreds and some just a couple of bucks. Regardless of your savings, you need to have your financial foundations figured out. Without it, you will probably spend the saved money on something else or will lose your motivations sooner or later.
To avoid financial mistakes you should always ask yourself if your decision follows the basic rules of personal finance.
1. Know your net worth
Why is this important? Because you want to understand where do you stand financially.
Take a piece of paper and a pencil. If you have a house write it down if you have a car write it down if you have some savings or investments write these down.
Now take your liabilities and write these down. Do you have a mortgage? Do you have a loan?
Now subtract the liabilities from your assets and you will have your estimated net worth.
It is important because you will generally want to increase your net worth.
You will want to see some progress here.
I cannot emphasize enough – PROGRESS.
If you buy a car, do not forget – the value of the car will depreciate, which means it will be worth less the next year and even less the year after.
Your net worth will decrease if you make wrong financial decisions.
2. Know your Cash Flows
Cash flow is extremely important. It may be even more important than your net worth.
Cash flow is basically the stream of cash you see every month. If you have a 9-5 job, your salary will be your cash inflow.
If you have a business, your cash flow will be the money you receive from your business activities.
If you have any side hustles, it’s great, because you have additional inflows in your monthly cash flow.
Why is cash flow important?
Imagine you have a big house, a sports car and maybe even a yacht, but there is nothing on your bank account and you lost your job.
What is going to happen?
There will be no cash flow. You will basically struggle to find any money to survive.
Once you understand the risk of having only one income source and none, or close to no savings, you will want to diversify the risks. Save more money and try to have more that one source of income.
3. Learn to budget
Once you know your net worth and your cash flows you definitely have to do one more thing: record your expenses.
You have to track your expenses in order to know where is your money going to.
Once you understand the outflows of the money you will want to optimise your spending to get the most value for the money on the one hand and not to exceed your average spendings on the other.
For that, you need a budget. You should plan how much money do you have to spend on certain spending categories: food, house, insurance, phone, etc.
Once you have a budget and stick to it you are on the best track to saving more.
The other benefit is that you can plan the spendings ahead of time. You know that you need to fix the roof in your house and this should be done in 3 month-time. What do you do?
Yes, you plan this expense in your budget. This way you know that the fancy new phone you wanted to buy will probably have to wait till you fix the roof.
Stay organized and it will pay off.
4. Spend less than you earn
This is so simple, yet so much people fail to do it.
You have to know your cash inflows and outflows and you have to stay focused and conscious.
Listen. You cannot accumulate wealth if you spend more than you earn or if you spend all you earn.
That is the first basic rule of getting rich. It is wealth accumulation. You want to have more and to have more you have to spend less than you earn, otherwise, there is no accumulation.
It seemed obvious, but in reality, it is really hard and requires discipline and sometimes re-thinking your needs.
5. Create an emergency fund
Sh*t happens. That’s life.
But once it happens you want to be financially prepared. Your cash flow might not be enough to cover the costs related to the emergency situation.
You need some cash on a side to be financial support in case something wrong happens.
The most important reason for having an emergency fund is that you can never predict what and when can happen.
There are much more reasons to create an emergency fund, you can find them here.
6. Invest
I want to give you one principal reason why investing is crucial. Just one. Read it and give yourself some time to think about it.
It’s called “time value of money”.
This is a pretty easy concept. $100 bucks tomorrow is less worth than $100 bucks today.
Why?
Because If you put $100 on a savings account with 2% interest rate you will have $102 after a year, so having $100 in a year time is less valuable as having it today.
Basically, if you have money and you keep it in your Christmas socks, the value of the money will decline over time. This means you will be able to buy less in a year-time for the same money than you would now.
This is the most basic reason you should invest your money.
However, please don’t just go and buy, buy, buy whatever investment that is currently promoted. Take some time to learn how to invest. Be careful with your money. The first rule of investing: “don’t lose money”.
These were 6 personal finance rules you should follow if you want to take control of your money. I hope this will help you to organize your finances and simplify your life. Do you know other basic rules of personal finance?
Original article and pictures take i2.wp.com site
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