Today’s post is a guest post from Raj Bhattacharjee of eLearnMarkets.com, which is a young vibrant company established with the vision of taking online financial education to a new level. Guided by their mission of spreading financial literacy, they are constantly experimenting with new education methodologies and technologies to make financial education convenient, effective, and accessible to all.
The views and opinions expressed in this guest post are those of the guest author and do not necessarily reflect the opinions or views of Defeating Normal.
Managing personal finance is a skill that all of us definitely have to be not only good at, but great at. This is one of the most crucial life skills that you cannot ignore at any cost. Being imprudent about managing money can easily delay your financial stability and cast a dark shadow on your future.
While most of us know this fact, chances are you might be struggling with managing your personal finances. Indeed, this is a lot easier said than done. If that is the case, then here are some simple, effective tips which can help you to manage your money and build a strong financial base for the future.
1. Save every dollar you can
If you carefully analyze how you have spent your money over the last few months, you will definitely notice that there were certain essential expenses which you had to meet. However, there will be many non-essential and avoidable expenses as well. Try to cut down on these non-essential expenses as much as possible. A rule of thumb for personal finance is “spend what you absolutely need to spend and save every dollar that you can”.
The non-essential expenses mostly will be on luxury items and recreational activities which can be curtailed to some extent. While I am certainly not saying that you should not go out for excursions or dine out with your family, there are good chances that you can reduce a portion of them. Try to do it for a month in a disciplined way and you will be amazed at how much extra you have been able to save.
2. Invest your savings wisely
The only way in which you can grow your money is to invest it wisely. The value of the money that you earn will slowly decrease with the passage of time due to inflation. So, you will need to invest your money in assets which can earn returns which beat the inflation rate.
Say, if the inflation rate is 6%, then you will need to invest your money in financial instruments that earn you returns of at least 6%. This way the money in your wallet does not depreciate in value over time. The higher the return that you get, the faster money will grow.
3. Get insured
A medical emergency or the loss of life of an earning member can easily derail the financial stability of any family. Medical bills can easily run into several thousands of dollars nowadays, which many of us will find very difficult to pay. Hence a medical insurance and a life insurance should definitely be a part of your financial portfolio. Get yourself insured and sleep well at night.
4. Build an emergency fund
Medical emergency or the loss of an earning member is certainly not the only disasters that can strike. Nowadays, with is a significant rise in competition and economic volatility, job loss is a very common problem. It has already struck many families. Though I hope you never face such a situation, you must still prepare yourself for it by building an emergency fund.
The ideal emergency fund should be enough to cover 3 to 6 months of the expenses you incur on your family and yourself. You must invest this amount in assets that can be easily liquidated, like savings accounts or mutual funds. Avoid investing this fund in real estate or any other investment which cannot be sold at a short notice.
5. Avoid costly debts
One of the golden rules of personal finance says “Never borrow money that you cannot comfortably repay”. Loans taken at a high rate of interest can easily snowball into a disaster very easily. Not only will you find it very difficult to pay back these debts, you will also unnecessarily end up paying a lot more than you borrowed because of the high interest costs.
The classic example of such debt is your credit card interest. This is an unsecured loan which is not as simple as it sounds. Average interest on the amount outstanding is 2.5% per month. This adds up to 30% per annum, not considering the associated charges. If you have taken loans at such high rates, always try to repay these first and repay the remaining debts only after that. Falling into the high interest debt trap is extremely common and it snowballs into unmanageable proportions quickly.
Keep these simple rules in mind while planning your personal finance and follow them diligently. If you want to know more about how to manage your personal and family finances, then you will find many good books and online courses which can teach you more such rules. These contain nuggets of wisdom from the experts which prove to be extremely valuable for everyone. Follow these rules and enjoy the satisfaction of leading a financially stable life forever.
How do you manage your personal finances? What methods have you found that work best for you? Which ones have not turned out so well?