Financial Habits: Managing personal finance is the most important aspect any individual must learn in order to plan for future. It takes time to become money smart. To become one, you need to develop certain financial habits.
To make it easy, here is a list of 7 Financial lessons for individuals in their early years of making money. These are hand picked methods which have been proven over years.
Habit 1: Stick to a budget
This might sound simple, but is never so easy. We have seen people starting off with confidence and quitting on the same in no time. Very few individuals actually stick to a budget, or keep track of every dollar they earn. It so happens, that after you visit a water park on the 1st weekend of the month, you might have to spend the rest 3 weekends at home eating plain simple food.
The overall reason for budgeting is to know where your money is going and make sound financial decisions using the same. For that, the foremost thing to do is to understand your spending habits and plan your budget accordingly. If road trips are important, they must be a part of your monthly budget. A good budget helps you save more in your emergency fund.
Tip: Document your receipts and expenses to understand if you have enough to save. Make changes to the expenses side as per your saving plans. Once done, you will be a streamlined budget for yourself that you can stick to.
Habit 2: Refrain from spending your entire paycheck
The secret to become wealthy lies is the word "invest". Investing in appreciating assets is what makes the bank balance. Earning more does not mean spending more. It might certainly mean saving more or investing more. We have seen instances people purchasing depreciating assets like car, phone etc. drowning in debt. At the same time, we have seen wise people purchasing used cars while investing money in real estate, stocks etc. This leads to the person purchasing an advanced car 2 years later, while making a full payment.
Tip: Start with spending 90% and saving 10%. Gradually increase the saving percentage. Considering the current world, the optimum target is to spend 70% and save 30% of your take home pay.
Habit 3: Give your financial goals a serious thought
Few questions you must ask.
What are my financial goals ? At what age ? How do I want to achieve ?
Is it possible to achieve with my current progress ? If not, what's my plan ?
Document answers to all these questions. This will help you come up with a concrete plan. The goal can be a vacation trip, a loan payback or buying a home. It can be anything. The answer lies in all these questions.
Tip: Plan for short term things, accomplish them and in the process, plan or long term items. This gives you the boost you require to accomplish your goals.
Habit 4: Know in detail about student loans
A majority of individuals within age 30, plan to go for higher studies. It might be a MBA, MS, PhD, PGDM etc. The core thing to understand is how you plan your finances. Read, understand, check and then go for it.
Tip: Have a look at the repayment structure, the division of principal and interest. Keeping in mind the number of years for you to repay, plan your budget.
Habit 5: Manage your Debt Situation
Any individual who starts his career gets a salary account and is usually offered his first credit card from the bank. That is when his credit score gets its first enquiry. People in their late 20s are very enthusiastic when it comes to buying a car or taking a foreign vacation. Few of them even go ahead and book their first house. This demands for a housing loan.
In order to manage these situations, it is important to know the amount of monthly payment that you can afford to make and then set your budget. If you are already into debts, use the snowball effect to solve the issue. Try to pay off your smallest debt first while paying the minimum due for the bigger ones. Once you are done paying it off, move to the next one.
Tip: Make sure your credit usage is directly proportional to your take-home-pay. As you income rises, increase your usage. Make sure you make early payments and close your debts whenever you get a chance, in order to get a breather. That is when you give yourself a chance to use the limit available for the next big thing.
Habit 6: Maintain a strong emergency fund
An emergency fund is always important. If you don't have it, you end up paying your car repairs using your credit card.
To maintain one, set a minimum balance for your account. Do not go by the minimum balance set by the bank, but set it yourself. Based on your monthly expenses, set an incremental value to your emergency fund.
Tip: Take out the emergency fund every time you get a credit to your account.
Habit 7: Keep your retirement in mind
Most individuals in their 20s don't want to discuss this word, i.e. "retirement". But the fact is that a simple plan can do wonders for the future. Set your VPF contributions and try to put in as much as possible for a wealthier future.
Tip: Retirement is a state of mind. Do not give it the first precedence. Live your life freely. Things will fall in place.
Conclusion
Here are 7 important habits one must develop in order to lead a worry free life.
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