tips on how to manage YOUR money
Sooner or later we all reach a point where we start thinking about what steps we can take to ensure a better financial future. The first time it occurred to me was in my early 20s, a few months after I started working at my first job. At that time, I started to read everything I could about personal finance. There were 5 steps that guided me through the process. I still use these steps today to help me reach my goals.
Step 1: Set clear financial goals
Identify what you want to achieve and how much money you need to achieve it. At first, I recommend starting with one goal. Over time, you might set both short-term and long-term goals, such as paying off debt, building an emergency fund, saving for retirement, and investing in a rental property or business. By having clear financial goals, you will be able to focus your efforts.
Think of short-term financial goals as those you want to achieve in the next 6 - 24 months and long-term goals as those you want to achieve in the next three years or longer.
Step 2: Create a budget and track your progress
Given that budgeting is a key part of personal finance, I wrote an article that covers the topic in-depth here. At a high-level, start by listing all your income sources and expenses, identifying areas where you can cut back and save. Then, allocate a portion of your income towards your financial goals. Finally, track your spending regularly to ensure you are staying on track.
Step 3: Pay off debt as quickly as possible
Debt can be a major obstacle, as the interest can consume a large portion of your income and limit your options. As you pay off debt, start by prioritizing high-interest debts, such as credit cards or personal loans. Additionally, consider consolidating your debts or negotiating a lower interest rate. Make extra payments whenever possible to pay off your debts faster.
Step 4: Build an emergency fund
An emergency fund is a safety net that provides you with financial security in case of unexpected events, such as job loss or medical expenses. To build an emergency fund, set aside a portion of your income every month and save it in a separate account. Aim to save at least 3 - 6 months of living expenses, and keep the money in a liquid, low-risk account, such as a savings account or money market fund.
Step 5: Invest for the future
Investing allows you to grow your wealth and generate passive income. There are many different ways to invest, some requiring more work than others. One of the simplest ways to start investing in the future is by maxing out your retirement contributions, such as a 401(k) or IRA. The nice thing about retirement contributions is that once the money is invested, there is not much more to do other than let the money to grow and reinvest the earnings. Diversifying your investments is another important aspect of investing in the future. While the stock market has done well overall in the past, there is no guarantee that it will do well in the future. Taking into account your risk tolerance and investment goals, you should plan more than one way to save and invest for your future.
These 5 steps may seem simple but you should expect that they will take commitment and dedication to do them right. Follow the linked articles to learn about topics that interest you.