We all know the saying, ‘Money talks’, but what is your money saying to you? If the only thing your money is saying is, ‘Bye, Bye’ as it disappears casually out of your bank account, it might be time for you to take stock of your personal finances. In this article you’ll find some great tips on whipping your money into shape and making it work for you, not the other way around.
What is Personal Finance and Why is it Important?
To understand personal finance, take a step back and look at the big picture. Businesses and governments have strict guidelines for managing their money and we expect them to do a proper job. We need to see ourselves as ‘Treasurers’ of our own little empire – and hold ourselves accountable for keeping our empire in the black. If that sounds daunting, don’t worry, it’s not that hard. You don’t need an accounting degree to manage your personal finances. All you need is a bit of time to sit down and work out where your money is going. Read on to see how to do this.
Tip Number One: Do a Money Stocktake
Money is a bit like time – if you don’t keep track of it, it seems to just disappear. According to a nationwide study in 2010:
Americans have an average cash spend of $233 per week, but can’t account for at least 9% ($21) of that cash. That’s more than $1,000 per year.
Sound familiar? It’s all too easy to lose track of what you are spending. A coffee here, a magazine there, it all adds up. So if you’re serious about managing your money, one of the best ways to start is to write down every single expense for a week. That includes coffees, lunches, shopping trips, drinks with mates, groceries – everything. Each night when you get home, write down that day’s expenses. Or better still, carry a notebook around with you and write down each spend as it happens (you could also use your mobile phone’s note feature). That way you’re less likely to forget something. This is a really empowering tip because you start to feel the beginnings of control over your money.
Tip Number Two: Money Boot-Camp
Once you’ve got your weekly cash spending written down, it’s time to whip your money into shape by using the ‘B’ word – a budget. The nice people over at mint.com have developed a free online budget planner. All you do is enter in your income and your expenses – including things like insurance, rent, car payments, and the cash expenses that you added up during the week. Most of these cash expenses will come under the heading of ‘Entertainment/Eating Out’. The program will calculate your total income and total expenses and give you a final amount – if this is a negative amount, it means you are spending more than you are earning – ouch!
So if you are in the red, you’re going to need to do some work with your money to get it into shape. But before you launch into a full-on assault of your spending habits, try the following ideas to ease yourself into your new disciplined money regime.
Tip Number Three: Little Changes Really Do Add Up
Don’t rush in and make big changes all at once or you’ll soon give up and go back to your overspending ways. Personal finance writer, Charles A Jaffe, has been quoted as saying, “It’s not your salary that makes you rich, it’s your spending habits.” The first place to make changes is those daily cash spends that you wrote down in the first week. When you do the budget, you enter in the weekly amounts and it calculates the annual amount for each expense. You’ll see that if you spend $4 a day on coffee, that equates to $1,040 per year! A $7 daily lunch purchase costs you $1,820 a year. Its incredible how these little amounts add up over time.
So, if all you do is reduce your coffee and lunch purchases to only every other day, you’ll have $1,430 extra at the end of the year to spend on a holiday or pay off your credit card. And that’s just the tip of the iceberg. You’ll be sure to find other little expenses that you can cut back on.
Tip Number Four: How to Manage Credit Cards
Credit cards are like alcohol – used responsibly they are great – but it doesn’t take much to lose control. Did you know that when you make a credit card payment, most providers will take that payment off the least expensive debt first? For example, if you’ve signed up for a 0% balance transfer card and then make a purchase on the card, you’re payment will go towards paying off the 0% balance first, while the purchase accrues interest at the normal rate. This is known as negative payment hierarchy. There are moves to outlaw this unfair practice, however it is still the norm.
If you carry a large credit card balance, you should find a credit card that offers 0% interest on both balance transfers and purchases for a certain period of time. And never use your credit card for cash advances, because as soon as you withdraw the money you are charged huge interest rates (up to 25% per annum in some cases).
If you are really having problems managing your money, once you have transferred your balance to a 0% balance transfer card, try not to use the credit card at all until you have paid off the amount owing. Yes, you will miss out on Frequent Flyer points and other rewards, but the benefits of these programs are far outweighed by the satisfaction you’ll feel when you start to get your money under control. Many banks offer prepaid or debit Mastercard and Visa cards, which allow you to use your own funds from your savings account for online purchases which require a credit card. They are a great idea. If you can only spend what you have in your bank account you’ll be much less likely to splurge on something that you can’t afford.
Tip Number Five: The Secret to Successful Saving
Once you’ve cut back on your spending and used those savings to pay off your credit cards, you can start thinking about saving and investing. Many financial planners and wealthy people will tell you the secret of successful saving is to ‘Pay Yourself First’. This concept was first introduced back in the 1920′s by George Classon in his book, “The Richest Man In Babylon”. Paying yourself first means setting aside 10% of your take-home pay in a separate savings account. The theory is that if you don’t put aside this amount first, then it will be gobbled up by the daily expenses of living. Once your credit cards are under control, factor this amount into your budget and you’ll soon see a very tidy nest egg developing. Whether you want to save for your first home, pay off your mortgage sooner or invest in shares and property, ‘paying yourself first’ is a guaranteed way to achieve your financial dreams.
Tip Number Six: Traps for Young Players
One of the biggest traps to avoid in personal finance are the ‘No Interest, No Repayments for 24 Months’ type offers touted by the big furniture and electrical stores. These offers sound great at first, but there are often hidden monthly administration costs. Plus, if you don’t repay the full amount within the time limit you will start to pay exorbitant interest rates on the remaining balance. If you do decide to take up one of these offers, don’t just pay the minimum amount suggested on the monthly balance report you will receive. Take out your calculator and divide the total amount owing by the number of interest free months and pay that amount each month to ensure you have a zero balance at the end of the agreement.
Another trap to avoid is using your mortgage’s redraw account for non-essential items. You should never use the extra money you’ve paid off your mortgage for things such as holidays or Christmas presents. Start a separate account for these types of things and keep your redraw amounts in place to help pay off your mortgage sooner, or use it for things that will add value and equity to your home – such as renovations.
Tip Number Seven: Planning for Life Events
Once you have your budget in place, you’ll need to make adjustments as your life situation changes. Getting married or setting up house with your partner will require you to work on a combined budget, and if you are thinking of starting a family you will need to work out how much extra you’ll need to raise a child. You’ll find a handy calculator at babycenter.com/baby-cost-calculator to help you with this.
An important element of any personal financial plan is life and income protection insurance, particularly if you have a family. If for some reason you are unable to work, income protection insurance will pay you a certain percentage of your income (up to 75%) for up to 3 years. There are also various other types of life insurance such as accident and serious illness cover which provide lump sum amounts. An insurance broker will help you to work out the best cover for your needs.
So there you have it. Seven tips to help you turn your personal finance into a lean, mean money machine.
