Good money management is a must if you want to become wealthy. Some people earn a lot but they are still just one or two pay checks away from going bankrupt. On the other hand, you have people who don’t earn much but despite that they are on their way to financial freedom. The difference is good money management. Here are a few tips about how to manage your money.
If you already have your finances under control, you may wonder why money management is important. Unfortunately, far from everyone have their finances under control. Some people simply run out of money long before the next pay check is due. Others have no problems paying their expenses but no money is invested. If they lose their job, they are in big trouble.
Few people like budgets but if you don’t know where your money is going, you can’t managing your money. A budget is relatively easy to create but sticking to it is much tougher. Few people possess the necessary discipline to follow a strict budget. Generally it is best to just include the large items in the budget and make sure that all your expenses are accounted for.
One of the main priorities of a budget is to make sure that you have some money to invest. The old rule about paying yourself first is very important. But before you can start investing, you should pay off any credit card debts. There are good debt and bad debt. Interest on credit card debt is generally very high. It is extremely unlikely that you can find investments with higher rate of return than the interest on credit card debt.
On the whole, it is important to avoid bad debts. In this content bad debt means debt on things you don’t absolutely need and can’t afford. Borrowing money to buy items that go up in prices is generally a good idea. Borrowing money to buy things that go down in value is seldom good for your financial well-being.
Assuming that you don’t have any credit card debt, you should make sure that you have an emergency fund. This can be used to pay unexpected expenses, rather than using your credit cards. But the main reason is that if your income dries up, for example if you lose your job, you will be able to pay your bills for a while. How large the emergency fund should be depends on your monthly expenses and how large your need for security is. For some people, being able to survive for six months is more than enough, others want to be sure that they have money for at least 12 months.
Once you a reasonable safety buffer, you can start investing some of money. The golden role is, always pay yourself first. It simply means that you invest part of your income before you start spending it. Often ten per cent of your net income is recommended. A lot of people set up an automatic monthly transfer to a mutual fund or similar. Most people who pay themselves first have not noticed that they are surviving on less money. Obviously, the more you put aside, the better. But it is very important that you get started, even if the amounts are small in the beginning. By getting into the habit of paying yourself first, you are on the right track. This is extremely important, far too many people simply keep on spending all their money. They say that once their income goes up they will start investing part of it. But virtually in all cases, when their income grows, they quickly find new ways of spending the extra money.
In order to be able to have money to invest, you may have to cut down on some expenses. This is not fun but if you keep on spending all the money you earn, you will never get ahead. Be creative, changing to a healthier life style can often both save money and improve your health. Some people may find this a boring solution but if it improves both your finances and health, it is worth trying.
One very important expense to get right is insurances. You need to be covered against huge setbacks. Even against things that are very unlikely to happen. If you are not insured, your saving could be wiped out.
Another important thing to remember is that often the best investment you can make is to invest in yourself. If you want to become wealthy, you need to be street smart. There are a lot of scams and poor investments that are being heavily marketed by promoters. If you want to increase your wealth, you must know the difference between a good and a poor opportunity.