How to Manage Your Finances?
Personal financial management is a subject that is not taught in many schools, but is something that nearly everyone has to deal with in their lives later on. Here are some statistics: Some 58% of Americans do not have a retirement plan in place for how they'll manage their finances when they get old.[1]While people generally believe they'll need about $300,000 to support themselves in retirement, the average American has only about $25,000 saved at the time of retirement.[2] Average household credit card debt among Americans now stands at a distressing $15,204.[3] If these facts are alarming to you, and you want to reverse the trend, read on for specific, targeted advice geared towards giving you a better future.
Part One of Four:
Make a Budget
1. For one month, keep track of all your expenses.
You don't have to limit yourself; just get an idea of what you spend money on during any given month. Save all your receipts, make note of how much cash you need versus how much you expense to credit cards, and figure out how much money you have left over when the calendar turns.
2. After the first month, take stock of what you spent.
Don't write down what you wished you had spent; write down what you actually spent. Categorize your purchases in a way that makes sense to you. A simple list of your monthly expenses might look something like this:
Monthly income: $3,000
Expenses:
Rent/mortgage: $800
Household bills (utilities/electric/cable): $125
Groceries: $300
Dining out: $125
Gas: $100
Emergency medical: $200
Discretionary: $400
Savings: $900
Part Two of Four:
Spend Your Money Successfully
1.When you can borrow/rent, don't buy.
How often have you bought a DVD only to have let it collect dust for years, without using it? Books, magazines, DVDs, tools, party supplies, and athletic equipment can all be rented for smaller amounts of money. Renting often saves you the hassle of upkeep, keeps room in your storage, and generally causes you to treat items better.
Don't just rent blindly. If you use an item for long enough, it may be best to buy. Perform a simple cost analysis to see whether renting or buying is in your best interests.
Part Three of Four:
Make Smart Investments
Familiarize yourself with different investment options.
As we grow up, we realize that the financial world out there is so much more complicated than we envisioned as children. There are literally options to trade imaginary items; there are futures to bet on things that have not yet happened; there are sophisticated bundles of stock. The more you know about financial instruments and possibilities, the better off you'll be when it comes to investing your money, even if that wisdom consists only of knowing when to back away.
2.Take advantage of any retirement plans that your employers offer.
Take advantage of any retirement plans that your employers offer. Often, employees can opt into a retirement 401(k) plan. In this plan, a portion of your paycheck is automatically transferred to a savings plan. This is a great way of saving, because payments come out of their paycheck before it's cut; most people never even notice the payments.
Talk with your company's HR representative about employer matching. Some larger companies with robust benefit plans will actually match the amount of money you put into your 401(k), effectively doubling your investment. So if you choose to put in $1,000 each paycheck, your company may pay an additional $1,000, making it a $2,000 investment each paycheck.
3.If you're going to put money into the stock market, don't gamble with it.
If you're going to put money into the stock market, don't gamble with it. Many people try to day trade in the stock market, betting on small gains and losses in individual stocks every day. While this can be an effective way of making money for the seasoned individual, it's extremely risky, and more like gambling than investing. If you want to make a safe investment in the stock market, invest for the long term.[8] That means leaving your money invested for 10, 20, 30 years or more.
Look at company fundamentals (how much cash they have on hand, what their product history is, how they value their employees, and what their strategic alliances are) when choosing which stocks to invest in. You're essentially making a bet that the current stock price is undervalued and will rise in the future.[9]
For safer bets, look at mutual funds when buying stocks. Mutual funds are bundles of stocks collected together to minimize risk. Think about it like this: if you've invested all of your money in a single stock and the stock price plummets, you're screwed; if you've invested all your money equally in 100 different stocks, many stocks can completely fail without affecting your bottom line. This is basically how mutual funds mitigate risk.
4.Have good insurance coverage.
Have good insurance coverage. They say that smart people expect the unexpected, and have a plan for what they'll do just in case. You never know when you'll need a large sum of money during an emergency. Having good insurance coverage can really help tide you over through a crisis. Talk with your family about different kinds of insurance that you can purchase to help you in the event of an emergency:
Life insurance (if you or a spouse unexpectedly dies)
Health insurance (if you have to pay for unexpected hospital and/or doctor bills)
Homeowner's insurance (if something unexpected harms or destroys your home)
Disaster insurance (for tornadoes, earthquakes, floods, fires, etc.)
5.Think about getting a Roth IRA for retirement.
Think about getting a Roth IRA for retirement. In addition to, or perhaps instead of, your traditional 401(k) plan — which is usually an employee retirement plan and a little different from employer to employer— talk with a financial advisor about getting a Roth IRA. Roth IRAs are retirement plans that let you invest a certain amount of money, and extract it, tax-free, after you turn 60. (Well, technically, 59 ½.)
Roth IRAs are sometimes invested in securities, stocks and bonds, mutual funds, and annuities, giving them the opportunity to grow significantly over the course of many years. If you invest in an IRA early on, any compound interest you earn (interest on top of interest) can create significant increases in your investment over time.
Consult with an insurance advisor about guaranteed income products. This type of planning allows you to receive a guaranteed amount in retirement that recurs each year without stopping as long as you shall live. This protects you from running out of money in retirement. Sometimes these payments continue for your spouse after your passing.
