Earning a healthy income is not the only factor that can provide financial security. How you end up managing your finances is of much more importance, and it paves the way to substantial wealth and financial independence.
Here are 10 important aspects that you need to consider in proper money management.
Drawing up a budget is the only way you can formulate a financial plan to keep track of your expenses in relation to your income. Initially, you do not need any financial expertise to plan your budget. Simply make a list of all the possible expenses you are likely to incur within your pay cycle and allocate an amount to each item. You only have to see if you are keeping your expenses within your income and whether there is any surplus.
2. Managing Mortgages
Mortgage payments are one of the biggest expenses in any household. Fortunately, there are many types of mortgage options available. However, it is crucial to understand the different types and select one that is most suitable. Cost of housing fluctuates, and there are many instances when prices have slumped. While selecting a mortgage option, make sure you can comfortably afford the monthly installment and it should not become a burden throughout the life of the debt.
3. Credit Card Payments
Look upon credit cards as powerful financial tools, which have to be handled very carefully. This type of credit is quite alluring and it can easily make you overspend. However, once you know how they work you will be careful. Do not fall into the trap of gathering many credit cards and making minimum payments on each. You will not only end up with a huge debt, but you might also not be able to break free. In order to avoid such situations, try to pay the full amount due by the end of the month, and only incur debt on important and unforeseen expenses. But if you save properly, you should usually have enough to cover the costs of any calamities so you are not pressed to the brink if something untoward occurs in your life because something most likely will.
4. Handling Taxes
Taxes seem quite complicated and their calculations can become quite overwhelming at times. However, it is important to understand the taxation system (but who really does and this is why so many people, certainly in the midst of this horrendous and worrisome IRS scandal, are calling for a flat tax), since there are a lot of saving opportunities available. Once you know these important aspects of taxation, you can take the proper steps to assure a substantial cut in taxes over the long term. Keeping track of your taxes through receipts and documents is a wise way of reducing certain amounts throughout the years.
5. Understanding Assets
Assets are of depreciating and appreciating types. Whatever you purchase will either increase or decrease in value over time. For instance, your vehicle is going to go down in value, while your real estate property might appreciate. Depreciating assets are also useful, but while purchasing such assets you need to make sure you acquire them at a reasonable price, and you do not accumulate too many of them than what you actually require. When you know the depreciating or appreciating nature of an asset, you can monetize this information. For instance, you could purchase a second-hand vehicle, whose value has depreciated considerably, but is in sharp condition nevertheless. Here you are acquiring an asset at a lower cost, but it serves the same purpose of a new vehicle.
6. Risk Evaluation
Money management is not only to do with managing expenses, but also considering various ways to make your money grow. However, there is an element of risk involved in any type of investments or savings. If you are not willing to take any risks, you cannot embark on any financial growth plan. However, taking high risks in order to become rich quickly might propel you down the bankruptcy avenue. Hence, it is essential to evaluate risks and take a middle path where you can attain outstanding returns and at the same time have a reasonable amount of security over your hard-earned money.
7. Effective Savings
Consider saving your surplus income over a long term, as you can benefit from compound interest. When the principal amount and interests over the years is compounded it makes a huge difference, compared to what you would be receiving if you had invested your money in a simple interest plan. Simple interest is calculated only on the principal amount, while compound interest takes into account the whole amount after adding the interest earned in the previous year.
8. Considering Index Funds
The stock market provides many options for growing wealth. Stocks by themselves can be quite risky for the uninitiated, but stock index funds could provide a middle path. When you have a limited amount to invest and do not have time to look into the workings of the stock exchange, then these funds are your best options. They offer a considerable growth potential when handled with reasonable knowledge and tact. Your amount keeps compounding and you can have a substantial return after a few years.
9. Retirement Plans
Everyone dreams of retiring comfortably, and not having to worry about finances. The retirement plans offered by the government, help largely in fulfilling such a dream. The popular ones are IRAs and 401(K) plans; however, you need to understand how each of them works and the possible tax benefits you can get out of them. These are efficient tools for saving over the long term, and for saving on taxes on the interest, you have earned. After understanding the various aspects of the plans, you will have to weigh in your personal circumstances before deciding on a plan.
10. Saving for an Emergency
You are not the Senate, the President, or California, you need to balance a budget and save for a rainy day. One cannot discount risk factors in life, and there are times when you will be facing an emergency, which will prove to be quite costly. Therefore, it is always wise to set up an emergency fund to take care of such expenditures, which can and often do come upon you unexpectedly. Emergencies can include the loss of a job, a car accident, sudden health issues, or another type of financial loss. During such times, you need some financial resources, to help you with these extra expenses. An emergency fund should be immediately accessible and not tied to some long term interest plan. Here your priority is to keep your money safe and accessible when needed.