Personal finance is essentially how an individual
manages their money and plans for the future. All the financial decisions that
you take during your lifetime will eventually have an effect on your finances,
both current and in the future.
No matter what rules we abide by, it is always
important to self-improvise on financial habits and health. To make it simple
and understandable for you, we have framed 3 rules that can help you improve
your financial health. Check them out below:
Rule #1:
Do the Math – Net Worth and Personal Budget
We know that you are certainly not an expert in
managing personal finances. But you just cannot keep ignoring it. Learning just
the basic of managing personal finances can help you evaluate your current
financial health. It will also help you determine how you can accomplish your
short term and long term financial goals.
Initially, you need to calculate your net worth.
The net worth is the difference between what you own and what you owe. For
calculating your net worth, make a list of all your assets (things that you
own) and your liabilities (things that you owe). Next, subtract your
liabilities from your assets which will give you the net worth.
The net worth is the representation of your
current financial position and it is very normal for the figure to fluctuate
over time. However, it is essential that you calculate your net worth on a
regular basis (we recommend at least once a year). By tracking your net worth
annually will help you evaluate your progress, highlight your successes and
identify areas that require improvement.
As we emphasise the importance of net worth, it
is equally important to develop a personal budget alongside. Having a budget
plan or expense plan drafted on a monthly or annual basis helps you:
·
Plan on your expenses
·
Reduce or eliminate the unnecessary expenses
·
Save for future goals
·
Spend wisely
·
Plan for emergencies
·
Prioritise spending and savings
Once you predict your expenses, subtract them
from your income. If you have some money left, you have a surplus amount and
you can decide how to spend, save or invest it. If your expenses exceed your
income, you will have to adjust your budget by either increasing your income or
cutting down your expenses.
Hence, it is highly recommended that you
regularly calculate your net worth and personal budget. Doing the math
correctly is all that matters.
Rule #2:
Recognise and Manage Lifestyle Inflation
Many people will spend money if they have it in
surplus to spend. As individuals advance in their careers and start earning
higher salaries, they tend to increase their spending simultaneously. This
phenomenon is likely to be known as lifestyle inflation.
Although you are able to pay your bills on time,
lifestyle inflation can be damaging in a long run since it limits your ability
to build your wealth. In other words, every extra pound you spend today will
mean less money later in life.
As your professional and personal life evolves
over time, there are naturally going to be some increase in your spending. But
here we want you to emphasis on the importance of saving money as well. One way
people can have some extra injection of money into their savings and
investments is by claiming for mis-sold PPI.
It may sound absurd to you right now, but PPI
mis-selling scandal has been making headlines in news every other day. Every
other individual in the UK have been mis-sold the policy by their banks or
lenders. So, you might as well just check your financial products to see
whether you had PPI on them or not.
Once you discover that you have had PPI and it
was wrongly sold to you, you can move on to make a claim by yourself or
with the help of claim management companies.
What we want to tell you here is, no matter what
lifestyle you are leading today, you would want to live the same lifestyle when
you retire. And to continue doing so, it is essential that you start saving for
your retirement from today.
Rule #3:
Recognise Needs vs. Wants
It is necessary that you are aware about the
difference between needs and wants, which will help you in making better
spending choices.
Things that you have to have for your survival
are termed as ‘Needs’, these include
·
Food
·
Shelter
·
Healthcare
·
Transportation
·
Reasonable amount of clothing
On the other hand, ‘wants’ are the things that
you would like to have but are not necessary for survival. Once your needs are
settled, then and only then should you allocate your income towards your wants.
However, keep a note that if you do have money
left over every end of the month after paying for the things you need, you do
not really have to spend it all on the things you want. There is the option to
save instead…
Abiding by these three rules, we believe, will
surely contribute to an improvement in your financial health.
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