Creating a budget for yourself will help you control your spending. This is a good habit to develop because it will benefit you throughout your lifetime. Although this may sound like an oversimplification, the ability to spend less and save more can have a tremendous impact on your future. To help you accomplish such a feat, here are six rules of personal finance:
1. Spend Less Than You Earn
Spending less than you earn is one of the most important rules of personal finance because doing so will leave you with a surplus that can be used to pay off debt and build wealth.
This rule is so important that it should be strictly followed with no wavering. Conversely, you will encounter some huge negative impacts down the road if you spend more than you earn.
2. Build an Emergency Fund
An emergency fund is exactly what it sounds like. It is money set aside to be used in case of an emergency, such as the loss of a job or a medical emergency. Here are some tips on how to start and maintain an emergency fund:
- Start with baby steps and build up.
- Keep emergency funds in a separate account.
- Make contributions automatic.
Most financial experts recommend that you save the equivalent of six months of income. However, Dave Ramsey recommends that you save “a starter emergency fund of $1,000 first.” Then, once you are out of debt, begin to work on a more substantial emergency fund.
3. Prioritize Debt Management
Getting out of debt should be a high priority. Suze Orman describes debt management as “managing your obligations so you can pay back what you owe.” To do that, you need a plan that shows exactly how much debt you owe and how to eliminate it.
This could be part of your budgeting process. It is important to be conservative and not fool yourself. You need to know exactly what your debt is costing, including interest and fees. Once you have that information, you can develop a plan to get out of debt.
Begin by dividing your debt into different categories, such as student loans, credit cards, and car loans. Prioritize paying off the debts that are costing you the most in interest and fees. Once each debt is paid off, apply those funds to the next most costly debt.
This will result in a snowball effect, and you will be surprised at how quickly you can get your debts paid off. By using this method, you will also find that you can pay off student loans in no time.
4. Take Advantage of Workplace Benefits
Effective employee incentives can make a huge difference in your financial picture. You should take advantage of any workplace benefits, such as life insurance, health insurance, pension plans, 401k savings plans and student loan repayment assistance.
One thing that makes these benefits so attractive is that they are typically tax free. Even if you have to pay for your health insurance, it will probably cost you much less than if you purchased an individual plan or paid your health expenses out of pocket.
If any of these plans, such as a 401k, provide matching funds, you should take advantage of them because the matching contribution is basically free money.
To get started with this, it’s important to collect the right information so that you understand what benefits are available to you and how they will affect your financial future.
5. Learn About Budgeting
Budgeting is much more than simply watching what you spend. Chris Hogan refers to a budget as “one of the most important tools you will use.” A good budget will list all of your expected income and expenses as well as a timeline.
This will allow you to see exactly what expenses are coming and when. Then you should be able to see exactly how you will cover those expenses with your income or other assets. If you need help setting up a budget, you may wish to read a book or take an online course.
6. Sleep on It
Sleeping on it is a good habit to get into because it helps you avoid impulse buying. After all, very few deals are so good that an immediate purchase is required. When you sleep on a purchase, it gives you more time to think through your decision and consider alternatives.
In many cases, the urge to make a sudden purchase will disappear, and you will be able to make a decision based on facts rather than emotions. A good rule of thumb is to wait at least 24 hours before making unnecessary purchases. For large purchases, such as a car, try to wait at least 30 days.
Make Wise Financial Decisions
Someone once said that “A budget is telling your money where to go instead of wondering where it went.” This quotation emphasizes the importance of gaining control over your personal finances and making your money work for you. It is the key to financial success.
If you want to improve your finances, begin by making a plan that includes a budget. Regularly monitor the plan and make adjustments as you go. Learn how to live within your means and eliminate your debt. This will free up money that you can invest, plus you will be in a much better position to survive a financial emergency.
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