Although having personal finance in order is one of the most typical features of what constitutes being an adult, many of us struggle for a long time with the way to achieve it.
In general, we go out into the working world without many notions regarding managing our money, having to learn based on errors and intuition, since we are almost never taught to manage money at any level or grade of the education system. For that reason, here we will discuss with you five tips to put some order in the handling of your personal finance.
1. Calculate the price of things in terms of time
Before buying something, think about how much it costs in terms of the hours you need to work to pay for it. In combination with this, think about how much is your cost of use. That is, the total cost divided by the times you will use it. For example, if a pair of jeans costs $ 90, and your hourly wage is $ 10, you need to work 9 hours to buy it. Added to that, if the pair of jeans are of good quality, and you will be able to use it many times, it is different from whether it will get rid of a few uses or if it will go out of style and you will not wear it anymore. A $ 90 pledge you’ll use twice ($ 45 for each use) is not the same as the one you’ll use every day for six months.
This is a habit that, once adopted, will help you make smarter decisions, such as stop buying things that you will never use, and start buying less, better quality things that will last longer and be a better investment.
2. Identify and eliminate unnecessary expenses
This obviously depends on each person, but, for example, many people consume all their entertainment content over the Internet: those people could easily get rid of a cable TV bill. Similarly, if you eat out very often, or if you buy a coffee every morning, it might be useful for you to calculate how much you would save if you changed your habits a bit, and then determine if you are willing to do so. This is linked to the third council:
3. Keep a spending diary
For at least a couple of months, write down everything you spend, detailing not only the amount but the concept, the date, and even the time. This will help you find patterns in your consumption habits, and determine, for example, if you spend more on a certain day or at a certain time, or if you spend too much on a category that you should not.
4. Set a budget
A budget, even a general one with certain freedoms, is the only way to keep track of all your income and expenses and to make sure you never run out of money to pay bills. There are applications to make budgets, or you can do it in a spreadsheet on your computer, or simply on a piece of paper. To create a budget, it is very useful to start by keeping a spending diary for one or two months. Once this is done, you have already identified what your expenses are, and you will be able to prioritize them and estimate approximate amounts for them. Starting with the payments you cannot avoid (such as rent, insurance, mortgage, debt payments), establish categories and set limit amounts for each. Do not forget to include an amount for entertainment or leisure (because a strict budget plan will weaken your willpower and you will not be able to abide by it) and an amount for emergencies.
5. Create the habit of saving
Saving can be extremely difficult when we are not in control of our finances, and it often happens that we are inconsistent or that we end up spending money at the first opportunity. It is useful to set a goal, think about what you will do with the money once you have reached it: for example, save for a trip you have always wanted to make. Once you have the habit, it is easier to keep doing it even without the goal.
Always keep in mind that it is very important to always have an emergency fund: some money to help you recover from a financial or emergency hit, such as when a household appliance is damaged, a pipe breaks or you suffer from an illness. Ideally, you should have at least the equivalent of three months of your budget in a savings account.
The percentage that is usually recommended to save is 20% of your monthly income, but this is just a guide: it depends on your income, your ability, and your goals to determine what percentage suits you. The important thing is that once you have made these decisions, your relationship with your money will be clearer and allow you to have a greater sense of control over your life. The peace of mind that you will have at the end of the month is worth the extra effort.