Cash flow management and dealing with personal finances turns out to be a tough job for a lot of people. There is a large ratio of people who have not dealt with finances as a child or as a student during their studies. This makes it more difficult as they have not taken any course on the subject in order to be prepared for dealing with financial matters as an adult individual.
There is a lot of material online including courses that you can take to learn how you can be in control of your finances, however, to be really in control you need to actually start dealing with your personal finances in a professional and a planned way. Financial management for a business involves planning, strategizing, implementing, monitoring, as well as reporting which makes it easier for businesses to take a decision. What you need is to replicate the same model of financial management to take control of your personal finances.
A lot of people make financial resolutions to control their finances but a lack of planning and strategy fails most. Having the following steps incorporated in your personal model of financial management will help you realize your target.
Start with creating a budget
The first step to knowing your finances is to create a budget that can play the role of a guide in how you make your financial decisions. Although it seems tough to be able to strictly follow a budget, yet it is the key to having financial independence. Budgeting enables you to have a transparent view of your financial situation which in turn help you to be better at managing your finances.
Recognize your income sources
Knowing the sources of your income and preferably having a number of income streams as opposed to a single payment per month can add to your financial ease. A clear picture of your income streams and their timing during a month can help you better plan your expenses. Another key point is to always keep your expenses at least 20 to 30% below your total income so you can build a cover for a rainy day as well as your retirement through savings and investment.
Have a clear understanding of your expenses
Ask a person to tell you about the total expenses they make in a month, there is a high chance they will not be able to answer it right. This phenomenon is so common that it has become one of the major reasons people end up saving nothing even while they are making a good amount of money per month. The best way of tracking your expenses is to divide them into monthly, one-off and entertainment/recreational expenses.
Every individual has a set of monthly expenses that they incur including rent, utilities, food, fuel, debt payments etc. track those items and make a list. Make another list of expenses that are one-off including investment on vehicles, equipment, furniture, and home-appliances etc. which you plan to buy during the year. The third category is entertainment and gifts; track the planned events that require such expenses including any planned vacation that you might want to take. This will help you have a clear picture of the total expenses you make per month versus your total income.
Avoid Impulsive Buying Decisions
Another reason people fail at saving is the impulsive decisions they take to incur expenses that are not necessary or are based on the impulse created by the aggressive marketing by companies and brands they like. There are people who have memberships to services that seldom use yet they incur a regular amount of unnecessary expense to be able to remain a member.
Create a fund for Rainy Days & Emergencies
A smart investor will always make a few financial resolution at the beginning of the year, and sticking to it makes you win! As much as you plan, there is always some room for emergency expenses that you will need to make because of any illness or accident. A healthy personal finance plan always has emergency funds incorporated in order to be prepared for unexpected expenses you might need to make.
It is recommended not to take out money from the emergency fund unless it really is an emergency that requires the expenses to be incurred. If you keep that fund in a savings account, you can earn interest on the saved amount. It also provides a cover in case of an emergency exit from your job or an unfortunate termination.
Has a retirement fund maintained?
There comes an age in most of the people’s lives when they have no other choice but to stop working either because of reaching the retirement age or due to deteriorating health. Having a fund maintained in order to support you through the retirement is always a wise decision as it gives you an extra shelter over and above the benefits you get from your retirement package.