Finance is a very challenging task in our daily life. Most people just don’t know how to keep track or even control their personal finances which consequently drive them to banckuptcy.
I was brousing this website (http://personalfinance.tipcentral.net/changinghabits.html) that give tips on how to handle personal finances. If you have time do browse through it. I’m just reposting parts that I found useful.
PERSONAL FINANCE: CHANGING HABITS
Most people fall into three general financial profiles. They either spend above their means, spend just what they have, or they spend less than their means. There have been studies done which show that 90% of the world’s wealth is held by 10% of the population, and that even if this wealth were redistributed equally, it would be back in the hands of the 10% within seven years. This illustrates that most people would find it difficult to change their normal spending habits, but in fact, this is the most important thing to guarantee personal financial health.
What this comes down to is learning what profile you fit in, and then learning how to change those spending, budgeting, and saving habits to meet your goals. Although many of these strategies will require discipline, the long term goals are clear: once you decide on a path, make the commitment to stick to it and you will find within a few months, you will begin adjusting your lifestyle to your new financial habits, which will, in turn, reinforce these new practices. Remember, nothing comes for free – long term financial goals require short term sacrifices, the trick is to find the right compromise that allows you to meet those long term goals while still enjoying life to the fullest in the short term.
If you often spend more than your needs, you best first step is to focus on a budget, looking for areas that are unnecessary and can be trimmed, and be prepared to have the discipline to stick to your new budget. If you often spend to your means, your best starting point is look for opportunities to build up your savings, which helps to reduce the risk and impact of unexpected expenses, and allows you to begin saving for the future. If you often spend below your means, you are in a good position to save to the future and should focus on savings that are structured to provide for better return on retirement, although, don’t forget to still enjoy life in the interim as many people that spend below their needs end up with a full bank account and regrets on missed opportunities and experiences.
The first step to getting your personal finances under control is to clearly understand where you are. Review all of your finances listing your assets and debts, including any loans, credit cards or other liabilities. Many banks will go through a similar process to evaluate your financial health, where they compare your income and assets with your debts and liabilities to come up with a percentage called your debt to equity ratio. It is important to be honest and thorough, as you will need to use this information to help build your financial plan.
Find a method of tracking your personal finances, either with a simple book and paper ledger or with automatic software packages like Quicken or Microsoft Money. This will not only help you track and budget how you spend your money, but the software can integrate with many online banking services which allow you to keep a virtually real-time picture of your spending. The important thing to do is to be consistent and make sure all of your spending and budgeting is tracked for a complete picture.
Once you have an accurate picture of your personal finances, you need to identify your short and long term goals. When do you want to retire? Are there specific purchases you are planning? Are there any time frames to consider? Are you planning for your children’s education or just interested in being debt-free?
Once you understand what’s important to you, you will understand what needs to be done to get there: how much you’ll need to earn, how much you’ll need to save, and over what period of time. Basically, know where you are, and where you want to be.
Budgeting is a critical process which forces you to look at what you’re spending, where you’re spending it, and thus be able to make informed decision on where changes can be made to meet your financial goals. Using software to track your finances and assets, you will get the added benefit of being able to tie it into budget planning. Chart out all your accounts and determine what online services your bank offers, as this will make it simpler automatically download your regular spending transactions and bill payments, to be integrated with your spending and budget tracking.
Try to switch your purchase habits to not make purchases with cash – cash spending can not be tracked easily with budget software – paying with a bank card or credit card will help keep an accurate record of where your money is going. This one habit will not only allow you to track and trend your purchases, but also provides invaluable visibility to your purchases. For example, you may discover you spend three times as much on groceries, or twice as much eating out at restaurants than you thought.
After you adopt this method, track your finances for several months and then revisit your budget – look at what you are taking in and what you are spending, and compare it to your financial goals. Look for areas where your spending can be reduced and adjust your budget accordingly. At its simplest level, budgeting is easy – you look at what you make, you look at what you’re spending, and you look at how much is left over to be put away for the future – if the numbers don’t match, it gives you a clearer process to shuffle your income accordingly. For example, some savings you may find are spending less on entertaining, reducing the cost of ownership of a car with a bad maintenance record, or shifting your eating habits to home cooking instead of takeout.
There are different reasons to save, and different approaches depending on what you are trying to achieve. One overall savings goal is to put money away for a rainy day; anything from health related problems, for repairs to a house or car, or an interruption to employment. Most experts say to put three months salary away to cushion life’s little emergencies.
Another common saving strategy is to target a specific purchase or expense, like a new sofa, or a vacation, and plan your savings around that specific amount. In this case, either put away a set amount every month, or even create a second bank account and divert the savings into that account so it can’t be touched, and once you reach the amount, you make the purchase with a clear conscience.
The important longer term strategy is more about saving for the future. Numerous books like the wealthy barber that were written about the huge long term savings benefits by making small changes in how and what you save. One of the easiest ways to approach this kind of savings is with small but regular saving program An often used example is that if two brothers both start saving money, with one starting at twenty and one starting at thirty five, the brother that started saving earlier would have ten times as much. The reason why savings can be so dramatic is that the money that you save increases not only as you save, but is accelerated by the compound interest that continues to grow over time.
The easiest way to put long term savings away is to set up an automatic withdrawal of funds. You may feel the difference in not having that extra money initially, but before long, you will adjust and will get used to it. Your budget will make sure that if it’s not there you don’t miss it. In fact, many companies allow flexible ways of having savings deducted directly from an employee’s pay, making it easier to keep sticking to the plan.