Personal Finance for Everyone: A Step-by-Step Guide to Budgeting and Money Management

By Susan

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Last Updated: September 11, 2021

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Building a personal financially secure life might appear to be a difficult job that needs the expertise of a professional financial data analyst and banking software developer. (lol) However, it shouldn't be that hard, the most important thing is knowing you're now in charge of determining the best path from where you are now to where you dream to be without taking any unnecessary diversions.

In this article, we have put together some important proven steps that can guide you in building a financially secure life.

All you have to do is relax and read on to the end.

It's only seven steps, and they're all achievable.

Some objectives will take years, if not decades, to achieve. That was part of the idea all along! But there's an instant payoff: you'll feel a lot less stressed the moment you start taking charge of all the financial issues that have been bothering you.

According to the year 2019 poll, 9 out of 10 individuals think that having their finances in good shape makes them feel secure, more confident, and a lot happier than ever.   The steps discussed in this article will get you in the door.

How do I read this article?

This article outlines the seven most important measures to take in order to achieve long-term financial stability. It's more advisable to read along from beginning to end, however, you skip to the section(s) you're interested in learning more about.

 

Create both short-term and long-term goals

Building financial stability is a never-ending balancing act. Several money-related things you try to do at once will be targets you want to achieve as soon as possible. Other goals may have a really far deadline, but they must be started sooner rather than later.

A good initial step is to make a comprehensive list of all your objectives. It's usually simpler to plan something when you know exactly what you want to accomplish.

It's entirely up to you how you want to keep track of your goals, both short and long-term objectives. Just make sure you allow yourself some alone time to consider what works best for you.

Here's a basic exercise: What are things that will make you happy financially? At its core, a financial plan provides the resources to make you feel comfortable and secure, allowing you to concentrate on living rather than worrying.

Consider the following possibilities:

Short-term objectives for the coming year or so:

Create an emergency fund not less than four months' worth of living costs. Limit new credit card expenditures to only what you know you can afford to pay off in whole monthly. Set and stick to a budget. Pay off any outstanding credit card debt.

Longer-term objectives:

Start putting aside a minimum of 10 percent of your annual gross earnings for retirement purposes. Put money aside for a down payment on a property. With a tax-advantaged 529 Plan, you may save for your kid's or grandchildren's education.

 

Have and follow a budget.

This isn't exactly a seductive subject. Agreed. However, making a budget is one of the biggest steps that allow you to achieve all of your other financial goals.

Budgeting is an act of making a line-by-line accounting of all of your salary or revenue — perhaps from a side hustle, possibly investment earnings including your spending.

The entire point of a budget is to be able to have a clear knowledge of where everything is going and make necessary adjustments if you aren't on track to accomplish your objectives.

Running your present cash flow via the standard 50/30/20 budgeting model is one method to examine it.

The aim of this strategy is to use only 50 percent of your after-tax income on necessities (like car maintenance bills, food, and rent/mortgage) and 30percent on additional necessities (like internet and phone bills) or a treat. The remaining 20 percent of total revenue is set aside for savings: putting money aside for retirement, accumulating emergency finances, and putting money aside for a deposit on a property or a new automobile.

Another approach is the 60 Percent Solution, which divides spending and saving objectives in a slightly different way. Yet, with the same purpose of ensuring you do not neglect long-term targets.

If your budget plan appears drastically different from either method, it's time to think about how you might reduce your expenditure or improve your revenue. (Welcome a side hustle!). This will put you on a strong road to achieving your short and long-term financial objectives.

To help you build a budget and measure your success, open a spreadsheet. Or make use of other budgeting applications that may be linked to bank accounts to help you keep track of your money flow in real-time.

 

Invest in an emergency fund.

How do you go about making your safety cushion? According to a Bankrate.com poll, 60% of Americans think they don't have enough emergency funds saved to meet a $1,000 unexpected expense. And one grand is unlikely to be sufficient. According to Bankrate, the average bill for those who had an emergency in 2019 was $3,500.

Setting a target on the amount you want to put in a savings account as an emergency fund is the first step. It's a good idea to have nothing less than three to four months worth of living costs saved inside an emergency savings account. Achieving this is not as hard as you might think, what you should do is to stop concentrating on the broader picture. The key is to set up an automated mechanism that automatically debits your earnings and credit your emergency savings account monthly.

The easiest method to do this is to create a new savings account separately at a bank for the purpose of saving for emergency funds. (Saving such funds in your main checking account makes it easier to use it on things that don't come as emergencies.)

The best returns are usually found in online savings banks. You can achieve this by simply setting up an automated debit transfer directly from your main checking account to the online savings account you might have created. it's advisable that you decline the debit card that your online bank may give you, so as to reduce the spending urge.

 

Pay off your high-interest credit card debt. 

The interest rate levied on delinquent credit card bills is known colloquially as "crazy." Despite banks commonly only paying depositors less than 1 percent interest on their savings accounts, they charge 17 percent or more average interest rate on unpaid credit card debt.

 

Clearing off high-interest debt is one of the best investments you can make as the average interest rate levied on outstanding credit card debts is a major obstacle to financial stability.

If you have a good credit score, transfer of balance to a new card is something you should check whether you qualify for. Depending on what you qualify for, you may be able to not pay interest for a year or more, giving you enough time to make a significant dent in your debt payments without having to worry about interest charges piling up.

If you're not qualified for a balance transfer, or it seems it’s not an option, there are two more common debt-reduction options to consider.

The "avalanche" technique makes a lot of sense if looked at from a financial viewpoint. Every single month, you make sure you make the minimum due payment on all of your credit cards, and then put in more funds to the credit card with the highest interest rate charges.

When you have completed the debt payments on your credit card that has the highest interest rates, then you can transfer the excess funds to the next-highest-interest-rate credit card. And then keep repeating the process as long as needed.

Are you stumped as to how to get some extra cash to put on the card with the highest interest rate? It's time to look over your monthly budget, with an aim to completely eliminate a cost or perform some clever nipping and tucking to decrease monthly expenditures for some of your bills. 

However, if you decide to use the "snowball" method, you'll send your additional monthly payments to the credit card that has the least outstanding amount. The appeal of this technique is that it gives a lovely bit of what I called psychological mojo: concentrating on the credit card that has the smaller amount will help you pay off your debt balance faster. Seeing your credit card debt drop to zero may be motivating... if that works well with you. Nevertheless, you'll save more funds with the avalanche approach.

 

Put money aside for retirement.

Whether you have a lot of time on your side or not, now is the perfect time to start saving for retirement. The longer you wait before you start getting proactive about this huge objective, the more you'll have to put in to ensure a comfortable retirement.

Despite that, there is no specific rule guiding the amount you should save for retirement; however, a good rule of thumb is to make sure you save a reasonable amount of your pay at various ages. For instance, it's a good plan to have at least 10% of your overall salary throughout your working-age saved for retirement. 

Using special accounts that provide substantial tax benefits is the greatest method to be able to save enough for retirement. Many businesses provide retirement savings accounts to which you can contribute. For example, the 401(k) plan is offered by private firms, and the 403(b) plan is offered by non-profit organizations and the government. And anyone with a source of income may put money into his or her personal retirement account, or IRA. IRAs are available from a variety of brokerage firms.

You may have the opportunity to select between a "Roth" and a "traditional" account if you have either both IRAs and 401(k)/403(b) plans, or any of the two. The difference is in when you take advantage of your tax benefit.

Traditional 403(b) and 401(k) accounts provide an immediate tax benefit: Your contribution lowers your annual taxable revenue. Depending on your earnings, traditional IRA accounts can also benefit from this upfront tax reduction. When you take money out of a typical retirement plan, you must pay earnings tax on every single dollar you take out.

In retirement, Roth 401(k) plans and IRAs provide a tax advantage. Your contribution today will not decrease your current income, and it will be made using after-tax cash. However, there would be no tax due whenever you withdraw money during your retirement.

 

Make long-term retirement investments. 

The amount of money you set aside for retirement is the most important element in determining how comfortable you'll be when it's time to stop working. However, the way you invest the funds in your retirement accounts also is crucial.

Investing for retirement can be done in several ways. For instance, you can invest in stocks, cryptocurrencies, or even bonds. Although stocks are way more volatile at times, they have traditionally provided better yields than bonds over extended periods of time (8 years or more).

Bonds are far calmer than stocks. They don't plummet like equities in bad times; on the contrary, when stocks plummet, bonds usually increase.  However, bonds don't yield as much compared to stocks.

The best stock-bond mix is determined by your personal objectives, risk tolerance, and how long you plan to keep your investments). This basic rule of thumb was proposed by Jack Bogle, the famed creator of Vanguard and persistent champion for individual investors: Deduct 10 from your current age, that is the amount of money you should maintain in bonds as a proportion of your total assets. Eg. a 40 year old investor would own approximately 30% bonds, 70% stocks.

 

Borrow wisely.

Taking out a loan for a large-ticket item is common. The home you wish to purchase. The automobiles you drive. Assisting your children in paying for college.

The secret to financial stability is to borrow just what you actually require. And that may be hard since lenders are only interested in informing you how much you can borrow whether you're trying to purchase a house, a car, or a college degree. No lender is going to advise you to cut back on your borrowing. They are less interested in how the loan they're pitching to you affects your capacity to achieve all of your other objectives.

Accepting the loan is your choice. To achieve your aim, you shouldn't borrow outrageously. By doing this, you will have more available funds to sort other important things. Do you require a vehicle? Okay, but do you think you need a new car?  Or is it possible that a less costly model might help your financial situation? Buying a three-year-old used car could save you from paying for the 40 percent to 50 percent depreciation that occurs in the first years after purchasing a new car.

 

Photo by Karolina Grabowska from Pexels

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2 comments on “Personal Finance for Everyone: A Step-by-Step Guide to Budgeting and Money Management”

  1. WHAT TYPE OF BUDGET TO YOU RECOMMEND FOR PEOPLE WHO ARE ALREADY RETIRED? MOST PEOPLE GIVE ADVISE FOR PEOPLE WHO ARE STILL WORKING

    1. Hi Nancy, we have a few articles on this topic, some that were inspired by your original comment in March.

      No Retirement Savings? 5 Things to Help You Get Back on Track
      Working After Retirement: 3 Benefits & 3 Cons You Should Really Consider
      Top 8 Simple Budgeting & Spending Tips to Help You Beat Inflation
      4 Budgeting Tips to Help You Save More Money

      Budgeting is about knowing what money is coming in and what is going out. Once you start tracking that, you will either be able to find areas where you can cut costs, or will need to figure out how to increase your income, through some kind of part time work (If possible), downsizing your transportation or housing, taking on a roommate, or getting more social security.

      Take a look at these other articles and let us know if they help you, circumstances are different for everyone, but the basic idea of budgeting is the same for everyone, you want to balance what goes in with what comes out as much as possible. Would an article on how people who didn't save for retirement can earn extra money help? Let us know and we'll look into it!

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