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Many are intimidated by the words financial planning and think they need some kind of expert knowledge on finance in order to manage their money wisely. The truth is, the more experienced and knowledgeable you are in this field, the better, but you don’t need to be an expert.
In fact, some pretty basic guidelines will help you master money management in no time, no experience required. Here are five golden rules of financial planning.
Understand the Importance of Budgeting
Personal finance is way too scary for most young people to even think about. A study conducted by the University of Illinois involving over 3,000 young adults showed that only 22 percent of participants were financially stable.
As a result, most young people don’t have the resources to overcome an emergency, if/when one occurs. This is a very serious issue. As nice as it would be to be carefree in your twenties, it’s going to cost you later. Mismanaging money leads to debt and accumulated debt leads to more debt.
Budgeting your money gives you control of your finances. It helps clarify where your money goes every month, how much you earn, how much you spend on unnecessary things, and most importantly, how much you can save.
Creating a spending plan gives you a clear picture of exactly how much you can spend on certain luxuries without diving into your rent money or money for necessities.
How to Start
To start budgeting, you need nothing more than a pen and paper, of course, but financial technology has enabled us to take the financial planning game to the next level.
There are various financial planning software that you can use to keep track of your spendings such as Mint or YNAB. There are countless more personal finance apps (free and paid) that offer numerous useful features so sift through them to find the one you like.
The Good Old 50/30/20 Rule
This has become a golden rule of financial planning and one that you’ve likely heard about before. If not, here’s how it works. The 50/30/20 rule, coined by financial expert Elizabeth Warren, is a simple budgeting plan that doesn’t dive deep into the details of different spending categories.
This rule assumes that 50% of your income is spent on your needs such as rent or mortgage, utilities, groceries, etc. 30% of your income goes to your wants such as shopping or whatever you don’t strictly need but enjoy spending money on.
The remaining 20% of your income is reserved for your savings account. This basic budgeting plan is a very good place to start managing your money. Of course, it doesn’t necessarily mean that the rule can be applied to everyone’s situation.
Paying Off Your Debt is Top Priority
Whether it’s a student loan or a huge debt on your credit card caused by a retail therapy spree, this debt is a huge obstacle in your financial plan. As long as it’s there, you won’t be able to focus on other important matters such as paying off your mortgage or starting a business.
Huge debt and a high-interest rate can be crippling. To pay it off soon, you need to pay more than the minimum each month.
To do this, you will probably need to cut some costs.
Cutting costs usually means saying goodbye to some or most of your wants and spending only on your needs. As difficult as it sounds, think of it as investing in your future. Because you are.
Making minimum payments towards your debt will cost you more in the long run.
The sooner you get rid of your debt, the sooner you can start saving for your retirement, investing, or getting that startup capital.
A study reveals that Americans owe $1 trillion in credit card debt. Borrowing habits keep increasing even when we’re fully aware we can’t pay these amounts back.
Founder of a Stash Wealth financial firm, Priya Malani, advises devoting at least 20% of your income (after tax) towards your debt.
Don’t Forget Retirement Savings
To many of us, retirement seems so far away in the future and we have so many wants and needs in the present... Saving money for your retirement when you’re in your twenties or thirties might, therefore, seem redundant.
But don’t be fooled. There are several reasons why retirement savings should also be a priority. First, the golden years will come sooner than you think. Second, compound interest. Simply put, the sooner you start saving, the faster your money nest will grow.
Insurance is a Must
All of the effort you’ve made to secure yourself and your family financially could be for nothing if you don’t have an insurance policy. Accidents and disasters happen and in the blink of an eye we could lose everything.
If anything happens to you, who will provide for your family? That’s what life insurance and disability insurance policies are for. In case of an unfortunate event, you and your family won’t be financially ruined.
It’s Never Too Soon to Start Investing
The term investing might sound too complicated and out of reach for you. But there’s nothing to be afraid of as long as you stick to a couple of rules.
But how can you invest if you struggle to make ends meet?
Here’s the good news: you don’t need to make huge investments, you can start with as little as $50. What’s important is the strategy. To invest wisely, you need to pick something that carries minimal risk. Also, read about investing in reputable magazines, learn from experts.
You can invest in stocks, bonds, mutual funds, or in a digital currency like bitcoin. You can find more tips on investing for beginners here, or pick one of the many robo-advisors to start.
As you can see, you don’t need to take a financial planning course to gain basic money management skills. All you need is to get informed and pick the right fintech tools to help you out on your budgeting journey. Apply these 5 simple but golden rules and keep learning as you go!