Considering our current, difficult work environment, managing finances appropriately is more important now than it has ever been. Even those who are safely, gainfully employed can never be too safe with their money. The problem for many, however, is that formal instruction in financial management isn’t as prevalent as it should be; many learn financial management the hard way—by making avoidable missteps. Thankfully, despite not being taught the subject in school, people learn how to better manage their finances without missteps, the easier way. This blog can help.
Understand a Basic Financial Pie Chart
Although every person, couple, or family has a unique way of managing their finances, there are some basic suggestions for how to split your income to both meet your present needs and plan for the future. Overall, many experts assert that between 28 and 33% of your income should go towards your housing—this includes your rent or mortgage, your taxes on the property, and your home or renter’s insurance.
The next biggest piece of your income—at around 20%—goes towards typical daily needs like bills, food, clothing, or any other necessary living expenses. 15% of your income already goes towards taxes, so you won’t have much access to that money at all unless you get a rebate during tax season. Saving for retirement should be around 10% of your income and another 10% should go towards a current savings account. Around 8 – 10% of your finances is devoted to “risk management” which includes car, health, life, and other insurances. A final 8% of your money goes towards debt repayment every month.
Track Your Spending—all of it—for a Month
Before even projecting what you would like to spend per month, track what you actually spend per month—exactly what you spend. Starting the first day of any given month, keep receipts for exactly what you spend, where you spend it, and when, and then divide the receipts into respective columns based on expenses. If keeping track of receipts is too much hassle, you can easily look on your online banking site—if you use one—to see where all of your money goes. At the end of the month, compare the money that going different places and ask yourself where the expenses might be trimmed. You might find that 20% of your income went to entertainment alone and you only put 5% in your retirement. If your goals are to put more in retirement, seeing the numbers will help you to better do that. By being honest with yourself and what you actually spend and not just what you think you spend, you can create a stronger financial plan.
Create Your Own, Reasonable Financial Pie Chart
After you have monitored your income for a month, make necessary changes based on your financial goals. Income-based pie charts vary person to person and month to month depending on what an individual or family’s finances are like, but it is still possible to make your own graph and stick to it. Sites like Mint.com offer the opportunity to create a financial pie chart and manage your finances completely for free. Microsoft excel also has the opportunity to graph your expenses. Even if you don’t adhere to a graph that looks like the one at the top of this blog, knowing what your graph looks like is a great start to managing your finances appropriately. If you feel that you aren’t putting enough into your retirement plan, for example, see where you might pull your other expenses from on your chart to compensate for the extra money you want to put into it.
Be Smart With Credit
Managing credit appropriately is one of the best ways to remain fiscally fit. First, before you get a credit card or get a second credit card, ask yourself if you really need what you can’t already afford with cash. Deciding what you really “need” can be tough, but truthfully ask yourself what you are getting the credit card for. Are you getting it for that new, flat screen TV? Are you getting that second credit card to go to Aruba? There is nothing wrong with either of these purchases, of course, but see if you can find a way to pay for these bigger purchases without credit, wait for them, or—sadly, perhaps—not make the purchases at all if you want to ultimately spend money in other ways.
If you do need to have a credit card, make sure you have a good deal on it. Look for low APRs, lower or non-existent fees, and no surprise charges. Credit companies change these things quickly and hope that you miss the mark. Watch carefully to see when changes take place with your card. Remember, too, that is possible to opt out of an APR increase and simply pay off what you have at the current APR. Finally, look at the charges you are putting on your card based on your monthly bill. If you don’t feel they are necessary purchases, you might consider if you actually need the card at all.
Plan for the Future
It’s easy to focus on the immediate needs of today, but remember that the future is equally—if not more—important to consider when managing finances. It’s difficult to know what will happen tomorrow or the next day and you need to be as prepared for any unexpected changes as you can. And even if you don’t have any unexpected changes, you’ll likely want to retire at some point. Even if the amount is small, make sure to save and plan for the future as much as possible. It’s an expense, but you might consider hiring a financial planner to get the most from your finances. After making a graph of your expenses and closely monitoring your expenses for a month, don’t stop doing so. Closely monitor your finances from here on out to really get the most out of your money.