1. Understand Needs vs. Wants
Proper spending choices are a critical backbone of making healthy financial decisions. It’s great to treat yourself to a happy hour cocktail or takeout dinner from time to time, but if you find yourself spending money on non-essentials far too often, it may be time to re-evaluate your spending choices.
Sometimes it can be challenging to distinguish between the two. Needs include food, shelter, clothing, and healthcare, all of which a savings account can be useful for. Putting aside 10% of your income, or a reasonable amount can be helpful. But what happens when needs can also be classified as wants? For example, clothing is essential, but the choice between practical, inexpensive, and luxurious designer clothing comes at two very different costs.
In general, our rule is this: the absolute essentials should come first in your personal budget. Once that is handled, calculate how much leftover income you have and understand it all doesn’t have to go towards your wants. It’s good to reward yourself for hard work, but it is also crucial to save extra income as well. Balancing both is key when maintaining a healthy personal budget.
2. Build and Maintain an Emergency Fund
An emergency fund is just what the name implies: money that has been set aside for emergency purposes. The fund is intended to help you pay for things that wouldn’t normally be included in your personal budget. This includes unexpected expenses such as car repairs or an emergency trip to the dentist. It can also help you pay your regular expenses if your income is interrupted
Although the traditional guideline is to save three to six months’ worth of living expenses in an emergency fund, the unfortunate reality is that this amount would often fall short of what many people would need to cover a big expense or whether a loss in income. In today’s uncertain economic environment, most people should aim to save at least six months’ worth of living expenses—more if possible.
3. Start Saving Early
It’s often said that saving for retirement is never too late. That may be true (technically), but the sooner you start, the better off you’ll likely be during your retirement years. This is because of the power of compounding
Compounding involves the reinvestment of earnings, which is most successful over time. The longer earnings are reinvested, the greater the value of the investment and the larger the earnings will (hypothetically) be.
4. Do Some Personal Calculations
Setting aside time to do some personal calculations can be very beneficial when dealing with personal finances. It’s not as tricky as people may think, and it gives you a better understanding of your income and goals when planning for your future.
Your net worth is the most valuable calculation. Writing down your assets and comparing them to your liabilities can accurately represent your net worth. Start by listing out all your assets (what you own) and all your liabilities (what you owe), and subtract the liabilities from your assets to figure out what is left. It’s a good indicator of your financial standpoint at the moment.
Calculating net worth every year is recommended since this number is bound to fluctuate yearly. It’s a great measure to track the progress of your finances, highlight successes, and develop plans for areas that need improvement.
5. Plan for Lifestyle Inflation
Typically, the older you get, the more money you will make. The more money you start making, the more money you start to spend. Lifestyle inflation takes hold in this directly corresponding relationship; as people advance in careers and earn more money, they spend more too. If lifestyle inflation is handled responsibly, there are also more opportunities to save.
Lifestyle inflation is not bad, but when you inflate spending habits, it’s also important to inflate your other financial goals. Don’t just spend more. Use lifestyle inflation to contribute greater amounts to your retirement and savings goals. Build up your emergency fund. Keep lifestyle inflation in check by staying on top of your responsible financial goals. You may enlist the help of a certified financial planner to help you do so!