Tuesday, April 19, 2022
A large percentage of the population is worried about their finances – across all income levels. Although some financial challenges are beyond our control, basic financial planning can equip you to handle whatever comes your way. Everyone needs to be empowered to make wise financial decisions.
There are 5 key components to managing your money: Earn, Spend, Save, Borrow, and Protect.
Before you begin spending, saving, and borrowing, you need to understand your paycheck to know how much money you are making. Do you make the same amount each pay period, or does that amount vary? Identify your gross and net income. You’ll also need to take into account any other deductions, such as your employer-sponsored health insurance and retirement plan.
Once you’ve determined your monthly net income, you are ready to spend responsibly, preferably with a personal budget.
A personal budget is simply a monthly plan for how you want to spend your money, but it is also a necessary tool to help you achieve your financial goals. Creating your monthly budget requires that you track your spending throughout the month. It’s helpful to break expenses into categories, but tailor it to fit your specific needs.
One of the most popular tools is the 50/30/20 rule. It recommends allocating 50% of your net income on basic needs, leaving 30% to spend on non-essentials and 20% for savings. This budget may not work for everyone, but it’s a great guideline for anyone who is new to the budgeting process.
We always hear how important it is to save money, but if we don’t have specific financial goals identified and a budget in place, it’s difficult to spend less than you earn. Ideally, your financial goals should include:
- Saving for an emergency fund – Set aside some money in an emergency fund to give you peace of mind and prepare you for those unexpected expenses that may occur. Most financial experts recommend having at least three months’ worth of basic living expenses in an emergency fund.
- Planning for retirement – It is never too early to start saving for retirement. A good rule of thumb is to set aside at least 10% of your take-home pay each month in a 401(k), IRA, or both.
- Saving for a big purchase – Taking an expensive vacation, buying a car, or paying for a wedding? The sooner you start saving, the less you will need to put aside each month.
- Paying off debt – Most of us have some kind of debt – student loans, credit cards, or car loans. Make sure you know the interest rates you are paying on your loans. Paying off higher interest loans on time or ahead of schedule can save you interest.
Even if you are frugal and have been diligently saving money, at some point you will probably need to borrow money to cover a large expense like a home or car. Borrowing money isn’t a bad thing as long as you know how to shop for a loan, pay it back responsibly, and protect your credit score.
As you begin putting these money management components in place, it’s important that you know how to protect the money you’ve made and saved. Review your bank account and credit card statements regularly for suspicious activity. Keep your confidential documents and passwords secure to prevent scams and identity theft. Determine the appropriate type of insurance to protect yourself in the event of an emergency.