One important aspect of our lives which many of us do not feel fully in control of is finance. Wealth is a necessary enabler for most good things in life. Whoever said money cannot buy happiness must have been in politics or sales. Despite the jargon associated with finance, managing money can be surprisingly simple once broken down into its composite parts. This article offers a doable common sense approach to effective personal finance.
Watch your finances
The prerequisite to managing something is the ability to measure it. The first step to taking control of your finances is tracking your incomes and expenses. You must have a thorough assessment of how much money flows in and out of your household. You can then put in place some controls and limits with a simple conventional budget. Budgeting helps ensure that you don’t overspend and don’t want for the essentials.
Avoid debt in all forms
The inherently insidious nature of debt can have unexpected long term effects. The most common form of debt is outstanding credit card balance. Such credit is designed to artificially inflate our purchasing ability using virtual wealth. This is meant to create a false sense of prosperity leading to less responsible spending behavior. Debt takes many other forms such as loans and mortgages. When under debt you are obligated to apportion part of your income toward repayment. All forms of debt work to limit the freedom you have in terms of allocating your income your time and your life. Compound interest is a powerful force. If you are under debt it works against you.
Be a responsible consumer
Did you know that television and other mass media are full of advertisements which are designed by expert psychologists to trigger impulsive and emotional buying behavior? Merely watching less TV can make you a more rational consumer. There are several more things you can do to make your buying decisions more deliberate and responsible. Make a shopping list in advance to avoid wasteful and inefficient buying. Compare multiple online/offline vendors on price and quality. Read product descriptions carefully and be aware of exactly what you consume. For more involved purchases opt to buy things that give you the most value for your money. If you plan to use something frequently for a long time for example, opt to buy from the more durable and superior quality options. The higher initial cost of such an asset will be more than offset by the convenience and time saved. That said, don’t miss out on the discount and flea market deals, and be shameless to drive a hard bargain whenever possible.
Pay bills on time
The nagging feeling of knowing that a bill is unpaid can be a huge detriment to your peace of mind and efficiency at work. Paying bills on time avoids the undesirable possibilities of late fees and service disconnections. One effective option to ensure timely payments is to automate them through direct debits or other similar means. In addition to ensuring on-time payments automation gives you a more accurate assessment of your disposable income. It is also important to check your bills for accuracy and ensure you are not being overcharged.
Savings are more effective if they are regular and purposeful. We understand well the power of compound interest. The earlier in life one incorporates a saving habit, the better. At the same time it is never too late to start saving. There is no fixed rule for how much you should save. It is important however, that savings should be strongly linked to goals. You may save toward buying assets, such as a car or house, for your old age, to finance your kids’ education, and so on. If you have multiple financial goals, ideally you would have multiple savings accounts. Make sure to not divert the savings from one goal for another purpose, or you’ll derail both. Maintain a separate ‘emergency’ fund to avoid such a possibility. You can also automate savings just as you would automate bill payments.
When you compare your financial status with your family, friends, neighbors, bosses, peers or others, you will invariably manage to find something to complain about. The key to finding happiness is to look within. There is no need to compare or compete with anyone else. Instead, stay focused on things that add substantive long term value to your life.