We live in a world where overloading knowledge is part of everyday life. But perhaps simpler is better when it comes to personal financial details. Financial planning allows customers to determine if they are on their way to achieving their goals and outlines their route to total financial success. It’s hard to know how personal financial success looks without a simple set of goals. Set your goals and then build a concrete step-by-step plan that will lead you forward.
Here are the golden rules of personal finance that everybody should know.
Distinguish needs from desires
Confusion wants to keep people in perpetual financial turmoil for their needs. Understand how simple human needs are -food, clothing, shelter, health care, trustworthy transport, etc. Ultimately, everything else is a desire. This simply means that we should actively choose what we want and not be constantly at risk of putting our financial security at risk. My advice to differentiate between a want and a need is to wait seven days to buy something. If on the seventh day you still want it, then you need it, if not, it was only a desire.
Set up the right mindset
Start changing your mind about money. Creating your wealth starts by controlling your spending habits. For example, some people save well, whereas others just spend all they have. Many people think you can only save if you have a high income, but the reality is that regardless of how much you earn, you can start saving now.
So, what’s a healthy money mentality? Well, it doesn’t matter how much you save at the beginning; what’s important is to start creating the habit of saving. Being knowledgeable about your spending and asking if you need the stuff that you spend on is also part of it.
When you start monitoring your expenses, I guarantee that you will be shocked to know where all your money goes! Decide what you think is good with money. Note, it’s not about how much you have, but about what you can keep.
Know Your Financial Situation
One of the major personal finance issues is not understanding what your current situation is. Debt, in particular, is an environment about which people avoid being honest with themselves. To effectively address debt, one must confront it directly, possessing a comprehensive understanding of the sources of income, the avenues of investment, and the totality of obligations incurred.
To better understand this, let’s compare it to when you make a road trip. First of all, you have to know where you are in order to get to your destination. Once you know your initial location, you will be able to get to where you want to go. So, by having a clear image of your sources of income, your expenses and your debt, you will know where you are standing to get where you want to go. This can be done quickly by using an application or making lists on a computer or a piece of paper. Your financial situation may be better understood if you create a spreadsheet with three columns: income, expenses, and debt. Once you know your financial situation, you will strengthen it, and make changes.
Pay Yourself First
The phrase “pay yourself first” is often referred to as the number one golden rule of personal finance. Paying yourself first will put you under pressure to generate enough money to cover all your expenses. The aim is to activate your brain and force you to think about different ways in which you can generate more money. It will help you make the transition from “I can’t afford that” to “how can I afford that?” In the long run, it will make you wiser, improve your standards of living, and generate wealth.
Now, how does the method “pay yourself first” works? An easy way to do this is by setting aside a fixed percentage of your income into a savings account before expenses. This is, of course, contrary to general practice, in which all expenses must be paid first before you decide what you can save from the rest. I know, it can be tough at the beginning but the key is to get out of your comfort zone and search for other income streams. In these days, you can become a millionaire just by having little money and a laptop. If you don’t believe me, ask Mark Zuckerberg, founder of Facebook.
How much should you first pay for yourself? I’m going to say it depends on each particular case. You must begin with the preparation of your monthly budget. Look first at your monthly basic needs expenses. This includes food, housing, fees for public utilities, insurance, and other recurring costs. Deduct this to your total income expenditures.
Anything left gives you an indication of what you can do every month. If this number is too low, you should look at areas where your expenditures can be reduced. Some people can choose to pay a certain amount each month. This is suitable for people who earn a daily fixed income. Others may choose to pay their savings account a certain percentage every month. The amount they pay will vary based on the salary they earn on a per-time basis. This choice can be good for self-employed individuals. Whatever your choice is, you just have to make sure the amount you pay yourself is appropriate. At the same time, it ought not to be too much to bother yourself.
When you adopt these golden rules, your net worth will automatically increase. It might take the first few months to keep a close eye on things to ensure that the process works as intended. Remember, controlling where you spend your money will change your financial life instead of letting your expenses determine your choices.
