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6 Tips for Managing Your Personal Finances
Far too often it is easy to skirt on by without paying attention to the little details of your finances when you’ve got a lot going on at work or in your personal life. For example, if you have filled up your credit card and your take-home paycheck has not increased or decreased by any significant amount recently, you may make the mistake of ignoring your finances.
Even if you are not making any large changes in your finances, it is important you keep track of some important financial figures every month. Knowing these six numbers below will help you set goals, prioritize payments towards these goals and see your progress over time. You’ll also become smarter about your spending, saving and the financial decisions you make on a daily basis.
1. Income After Tax
How much are you actually bringing home after taxes? Knowing your real take-home pay is key to knowing how much cash you have to work with in order to pay your bills and achieve other goals you have such as saving for your home, education, family, travel and retirement. If you are self employed, be sure to subtract your estimated tax amount from the immediate cash you have received. Also if your income is variable, take a look at your income over the last six months and use an average as estimate.
2. Contributions Towards Retirement
How much are you saving every month for your retirement? Are you saving at all? Too often younger people avoid making retirement contributions altogether. The earlier you can save, the more money you will have available for your retirement. It is advisable to start saving right away whatever you can and build up to a regular monthly amount. While contributing 10% of salaries towards retirement is suggested for 20-year-olds, the amount jumps up to 15% at age 30 and to 20% at age 40. Going from no savings to 15% or 20% can be too big of a leap at first, You can start by at least contributing the same amount that your employer can match and then building it beyond that.
How much will you need for your retirement? If you intend to retire by the age of 65, you will want to have a minimum of 60% to 70% of your current income. It is advisable to always save more. Yearly contributions grow at an exponential rate when you invest as you benefit from the power of compound interest. Investing cash in the stock market at the average annual rate of 7%, can grow your money significantly compared to letting it sit in a savings account with an interest rate of 0.06%, the current average rate.
3. Debt and Associated Interest Rate
How much do you owe? Debt can start growing beyond the original borrowed rate significantly when you have a higher interest rate. If you have a credit card, you can expect an interest rate of 15% or more on average after any special introductory offers. It is important that you know how much you owe, at what interest rate and to whom. What is your minimum payment on your loans and credit cards? Aim to pay more than your minimum balance every month. Pay down your balances as fast as you can. If you pay the minimum balance only, it can take many years to pay off even just a few thousand dollars, by which point you may have even forgotten what you bought with that credit card. Make a strategy to pay off your debt in full as quickly as you can. If this means you forgo some luxuries or additional expenses, be willing to do that so you can free yourself of debt and enjoy greater peace of mind.
4. Cost of Living
How much do you pay every month for your rent or mortgage? How much do your utilities cost? What’s the cost of your health insurance and any monthly prescriptions you have? On average, how much do you spend on food? What’s the cost of your car from car payments to car insurance, fuel and repairs? Knowing your monthly costs will help you in planning. You may also find that you are paying too much for certain amenities or find ways to lower expenses through good habits. For example, you can lower your electricity bill by using the washer and dryer on the weekends and after hours instead of during the day.
5. Credit Score
Credit scores affect your ability to borrow money via credit cards and loans. Having an excellent credit score can give you perks like waived deposits for utilities and other monthly expenses. Knowing your credit score is important and you will want to check your score periodically for changes and errors. Before you apply for a loan, it is advisable that you check your score so you are prepared and know whether you should apply now or wait and improve your credit standing first.
6. Savings
What are your savings? Do you have an emergency fund? Ideally, you will have three to six months savings put aside in an emergency fund that you do not access on a daily basis. Learning to save is essential at any age. You can also break up your goals into savings goals such as saving for your home or saving for your vacation. Start small and build. Achieving even a small savings goal is very rewarding and will help spur you on to save more and achieve your next goal.
