How to manage your personal finances and become financially lit!
Updated: 3 days ago
Getting money is one thing, but managing money and understanding how to make it go further is a life skill that many people lack. The sad truth is that financial literacy has only recently – if at all, been brought into the educational curriculum.
Young people are encouraged to take out thousand-pound loans for university education, before being taught, how loans, APR, interest, and debt, all works.
You can be making heaps of money, but if you don’t know how to manage it, you’re likely to spend more than you earn, neglect, saving, let alone investing, be living paycheck to paycheck and live a life of financial instability. This lack of education is what keeps people in the same cycle to break the cycle you need to be different, you need to think strategically, think long-term, and have the discipline to make smart moves now that will set you up for a great financial foundation.
How to manage your personal finances
Budgeting What is Budgeting?
Budgeting is the process of creating a plan for your money. It’s about understanding your income, tracking your spending, and allocating funds to different categories such as living expenses, savings, and discretionary spending. It’s not about depriving yourself; it’s about making your money work for you.
Why is Budgeting Important?
Budgeting is the cornerstone of personal finance. It gives you control over your money, reduces financial stress, and helps you make informed decisions. It allows you to see if you’re living within your means, where your money is going, and where you might need to make adjustments. It’s your financial roadmap, guiding you towards your goals.
Budgeting: The Secret Weapon of Successful People
Successful people understand the value of a dollar and the power of a budget. They know that every financial goal, be it starting a business, buying a house, or retiring comfortably, starts with a budget. It’s not about having a high income; it’s about managing whatever income you have effectively. As the saying goes, “It’s not about how much money you make, but how much you keep.”
How to Budget
Start by listing all your income sources and expenses. Categorize your expenses into ‘needs’, ‘wants’, and ‘savings or debt repayment’. A popular method is the 50/30/20 rule: aim to spend 50% of your income on needs, 30% on wants, and save the remaining 20%.
Next, track your spending. You can do this manually, use a spreadsheet, or use a budgeting app. The key is to find a method that works for you and stick with it.
Finally, review and adjust your budget regularly. Your budget is a living document. As your income, expenses, and priorities change, so should your budget.
Saving Saving is the act of setting aside a portion of your income for future use rather than spending it immediately. It’s about delayed gratification and prioritising long-term financial health over immediate wants. It’s not just about accumulating money, but about building a safety net and working towards financial goals.
Why is Saving Important?
Saving is important for several reasons. It provides a financial buffer for unexpected expenses, reducing stress and preventing debt. It enables you to achieve financial goals, such as buying a home, starting a business, or retiring comfortably. Saving also gives you the freedom to make choices that align with your values and aspirations, rather than being dictated by financial constraints.
Saving: The Foundation of Financial Success
Successful people understand the power of saving. They know that every dollar saved is a step towards financial independence. They recognize that while income can fluctuate, a strong savings habit provides stability and growth. As financial guru Dave Ramsey says, “The secret to building wealth is simple: Save money and invest it wisely.”
How to Save
Start by setting clear, achievable savings goals. Whether it’s for an emergency fund, a vacation, or a down payment on a house, having a specific goal can motivate you to save.
Next, determine how much you can realistically save each month. A popular guideline is the 50/30/20 rule, which suggests saving at least 20% of your income. However, the right amount depends on your income, expenses, and goals.
Automate your savings if possible. Setting up automatic transfers to a savings account ensures you prioritize saving and reduces the temptation to spend.
Managing debt Understanding Debt Debt is money borrowed that must be repaid, usually with interest. While it can be a useful tool for financing education, a home, or a car, it can also become a burden if not managed wisely. High-interest debts, like credit cards, can accumulate quickly, making it harder to pay off the balance.
Why Managing Debt is Crucial Managing debt is crucial for financial health. High levels of debt can lead to financial stress, damage your credit score, and limit your ability to achieve financial goals. It can also cost you a lot in interest over time. While it can be motivating to see your investments grow, it’s generally advisable to clear high-interest debt before investing, as the cost of your debt is likely to outweigh the returns on your investments.
Steps for Getting Out of Debt Understand your debt: List all your debts, including the amount owed, interest rate, and minimum payment. This gives you a clear picture of your debt situation.
Create a budget: A budget helps you allocate money towards debt repayment while covering your essential expenses.
Choose a repayment strategy: Popular methods include the snowball method (paying off smallest debts first to gain momentum) and the avalanche method (paying off highest-interest debts first to save on interest).
Make regular, timely payments: Avoid missing payments to prevent fees and damage to your credit score.
Consider professional help: If you’re struggling, consider speaking with a credit counselor or exploring debt relief options.
Tips for Successful Debt Management
Prioritise high-interest debt: These debts cost you the most, so aim to pay them off first.
Avoid adding more debt: Resist the urge to take on more debt while you’re paying off existing debt.
Communicate with your lenders: If you’re struggling to make payments, reach out to your lenders. They may offer hardship options or be willing to negotiate your repayment terms.
Celebrate small victories: Each debt you pay off is a step towards financial freedom. Celebrate these milestones to stay motivated.
Remember, managing debt is a journey. It requires patience, discipline, and sometimes, making tough decisions. But with each step, you’re moving closer to financial freedom. So, take that first step today, and start your journey towards a debt-free life.
Credit scores Understanding Credit Scores
A credit score is a numerical representation of your creditworthiness, used by lenders to assess your risk as a borrower. In the UK, credit reference agencies (CRAs) like Experian, Equifax, and TransUnion calculate credit scores. Each CRA has a different scoring system, but generally, a higher score means you’re seen as lower risk, which could make you eligible for better credit deals.
Why Credit Scores Matter
Your credit score impacts many aspects of your financial life. It can influence whether you’re approved for credit cards, loans, and mortgages, and the interest rates you’re offered. It can also affect your ability to rent a home, get a mobile phone contract, or even pay for utilities.
Factors Affecting Your Credit Score
Several factors affect your credit score:
Payment history: Late or missed payments can negatively impact your score.
Credit utilisation: This is the percentage of your available credit you’re using. A lower percentage is better.
Length of credit history: A longer history of managing credit responsibly can improve your score.
Credit mix: Having a variety of credit types (credit cards, loans, etc.) can positively impact your score.
New credit applications: Regularly applying for new credit can lower your score.
Improving Your Credit Score
Improving your credit score isn’t an overnight process, but with consistent effort, you can see significant improvements. Here’s how:
Pay on time: Make all your credit payments on time. Setting up direct debits can ensure you never miss a payment.
Keep credit utilisation low: Aim to use no more than 30% of your available credit.
Check for errors: Regularly check your credit report and dispute any errors you find.
Limit new credit applications: Only apply for new credit when necessary.
Register on the electoral roll: This provides proof of address and stability, which lenders favour.
Tips for a Healthy Credit Score
Start building credit early: Even a small credit card used responsibly can help build your credit history.
Don’t max out your credit cards: This can signal financial stress and lower your score.
Don’t close old credit accounts: The age of these accounts can help your credit score, even if you don’t use them.
Seek help if needed: If you’re struggling with debt, seek advice from a credit counselling service.
Remember, a good credit score is your ticket to favourable financial opportunities. It’s worth the effort to understand, protect, and improve it. So, start today, and watch as doors open on your financial journey. Hopefully this guide has helped and you feel more confident in how to manage your personal finances! It will take some time to get there - possibly even years but if you start and remain consistent and diciplined, you will get there!