Mastering your personal finances can be tough and Accounting terms can be confusing. You will need to get comfortable with financial terms and tracking your spending. Here are some tips to take control of your personal finances and plan for the future.
1.Make The Decision To Learn Financial Terms
Taking control of your finances means making a commitment to learn. Here are some basic financial definitions you need to know:
- Assets: Any item you own that has intrinsic value. That could be your car, your home, even in the cash in your bank account.
- Liabilities: A legal claim against your assets. This could be a mortgage, credit card debt, or even a phone bill.
- Interest Rate: The percentage a lender will charge you to borrow money. This normally quoted on an annual basis.
- Net Worth: The difference between the sum of your assets and the sum of your liabilities.
- Savings Account: A bank account that earns interest. Usually, very low interest rate are offered.
- Checking Account: A bank account that normally does not earn interest. Funds are frequently added and withdrawn for daily expenses.
- Investment Account: An account where funds are invested into a variety of assets and may not be withdrawn on short notice.
- Personal Credit: There are 3 credit bureaus: Experian, Equifax, and Transunion. Each of them lists all of your debtors you currently owe, or may have paid off, and your payment history. This makes up your credit history that tells creditors of your ability to borrow from a bank or other institution. Your personal credit history may also include a FICO Score that is represented as a numerical three-digit credit score to rate your credit worthiness.
2. Develop Good Finance Habits And Make A Plan
Good finance habits start with knowing your current financial situation.
- You need to calculate your total household income and your total household spending.
- Develop a spending plan that allocates portions of your income to specific expenses, such as rent, food, and transportation. Write this down and eventually transfer to a budget spreadsheet. If expenses are consistently high you may need to re-access your “needs” from your “wants”. This becomes very helpful so that you can see where you are wasting money.
- You also need to commit to saving for retirement. You can make saving automatic by creating a monthly recurring deposit to a savings or investment account.
3.Execute Your Plan
Let’s put it into action.
- Make a short-term plan (6-12 months) and a long-term plan (2-5 years). Your short-term plan will start off by keeping your expenses less than income. You can start attaining small goals and then you can focus on the long-term plan of building your net worth. This may involve investing in a 401k or other investment or retirement accounts.
- Separate Daily use accounts from your “savings account.” If you don’t have these, get one. If you have made some mistakes and cannot obtain an account with some of the major banks, there are second chance banks, online banks (please make sure they are reputable and FDIC insured), and credit unions. This is about getting your finances together so if you owe a “bank” money, you need to pay it off. Also, many banks have accounts where you can separate your daily use funds from your “goal funds” by naming the account accordingly. Thus, you will less likely intermingle the allocated amount and you can see it grow.
- Put all of your financial information into a spreadsheet and check your progress each month. You can download an app on your phone or a free budget spreadsheet. This will help you track your spending and see if you are consistently overspending in certain categories. If you keep overspending on food, for example, see if you can save money by using coupons or do comparison shopping.
- Executing your plan requires constantly checking your progress and sometimes making adjustments.
4. Adjust Your Plan
You need to make sure you’re flexible when developing your financial plan. The following developments can force you to adjust your plan:
- Your income can change
- You might face an unexpected bill
- Your home value could rise or fall
These developments may mean you have to take out a loan or adjust your monthly budget. Always make sure to leave some “cushion” in your budget in case things go wrong.
5. Stay Committed
When times are tight, you need to adjust your plan. Those unexpected expenses might require some belt tightening. The reverse is also true; you might see a financial “want” that’s out of your budget. Once you’ve set your budget, you need to stick with it. Sticking to your plan provides stability to make long-term financial decisions. That discipline will pay off as you gradually grow your net worth.
6.Preserve Cash
You may make great investments and control you expenses but liquidity is key. Liquidity means being able quickly convert your assets (usually cash) into other assets. For example, you might buy your home at the right time and see it significantly appreciate in value. However, if you don’t have cash on hand to pay rent it doesn’t matter how well your investments are doing. Also make sure you have cash on hand to pay your usual day-to-day expenses.
