3 Simple Steps to Improve Your Finances Significantly
Financial management begins at home, right from the time you start getting your pocket money to when you manage and maintain complex investment portfolios. The idea is the same – to maximize profits and reduce risk. However, the ultra-modern way of living and maintaining an unbalanced lifestyle has not left much space for managing finances. This has narrowed things down to mere income and expenses. Only after an emergency or a sudden need for money do you realize that this primary aspect needs immediate attention.
Here are 3 simple steps to improve your finances significantly:
1. Formulate a budget
Budgeting is an extremely vast domain and people tend to misunderstand its importance. Budgeting essentially accounts for having to know where the money is coming from (all income sources) and where it is going (all expense outflows). One significant aspect of budgeting is savings. Hence, income, savings, and expenses are the three essentials of a good budget.
When you develop a budget, make sure you do these three things:
- Keep an account of your spending
Tracking your spending means knowing where your money goes. In order to make a robust budget that ensures transparency, you must track down every single penny that goes out of your pocket. This will require you to take note of all forms of credits like credit and debit card payments, coupon cash, money exchange, internet banking, etc. Including all these expenses will give you a fair idea of where you are spending your money. It is only when you start tracking your expenditure that you realize how lavishly you can sometimes spend and how and where you can save up.
- Boost your savings
Most people follow a rule of saving what is left after they have exhausted their salaries on their needs and wants. This approach may prove to be fatal in the long run. Savings should be your priority and not come out from your leftover money. Given the inflation and increasing demands, it is normal for a major portion of your income to go into expenses. However, you also need to manage your money well to preserve wealth for future use. As a general rule, you must aim towards saving nearly 30% of your income. Nearly 50% can be spent on your needs and 20% can go to your wants.
- Invest your savings
Saving your money is not enough, it also needs to be appreciated over time to manage inflation. Depending on your risk capacity and investing nature, you can choose suitable instruments and invest accordingly. Investors can broadly be categorized as conservative investors and aggressive investors. Investing money is crucial as it can grow your finances with time. While the saved money is stagnant, invested money is dynamic and ensures both wealth preservation and appreciation.
2. Plan your investments
Once you have decided to invest your money, you need to put in some research and homework into finding the most fitting investment instruments. Planning your investments is a crucial task as it will lay the foundation for your future wealth. There are a few things that you should consider while managing your investments. For instance:
- Investor type: Aggressive or conservative
- Investment horizon: Short-term, mid-term, or long-term
- Intent of investment: Wealth preservation or wealth creation
- Income at disposal
- Return expectations
- Debts or loans
These inputs can help you decide the right instrument to put your money in. The next step in managing your investments is to set a goal.
- Pick a goal
This is an important step in building up an empire. Envisioning your estate and setting timely targets will give you direction. Depending on the set goals, you can pick your choice of saving and investment instruments. Ideally, your portfolio must contain a combination of fixed return and equity assets to strike the right balance. Other important factors that play a significant role in your estate building are management skills, market understanding, and prevailing market situations. You will need to time the market at regular intervals and stay up to date with the latest market trends to ensure maximum benefits.
- Include your family
Another important step in managing your finances is to secure your family. This may include having individual health and life insurance plans and creating a will with clear declaration of inheritance. You must also name the rightful nominees in all your insurance, retirement, and bank accounts. This will provide additional monetary security to your family in your absence. It is also advisable to share vital financial details with your family members to avoid confusion and delays in urgent times.
3. Clear off your debt and streamline your retirement funds
Another very important aspect of financial management and wealth creation is to regulate and clear off debt in a timely manner. As you start saving money, the priority should be to channelize the maximum possible amount towards clearing off your debt. This can be in the form of credit card bills, loans, mortgage, and borrowed money, etc.
Once you have cleared off a major portion of your debt liabilities, you need to simultaneously start preparing for your retirement. As far as it may seem, planning for retirement should start quite early in life. To keep up the lifestyle you are leading presently, you must ensure a suitable retirement investment plan. You can pick a 401(k) account, a Roth individual retirement account (IRA), an employer funded plan, or mutual funds, etc.
While clearing debt should be a priority, timely contributions to retirement funds is also crucial to ensure long-term stability.
To sum it up
Managing finances is all about figuring out a suitable plan and prioritizing accordingly. Following a simple rule of saving more than spending will reap greater benefits in both the near and the far future. However, financial decisions can require diligent planning and curating a strategy that stays put throughout.
If you wish to seek professional help, you can reach out to financial advisors to rule out any ambiguities and prepare well for the future.