The 5 Most Important Keys To Successfully Managing Your Personal Finances

Personal finances play an important role in the life of every resident. Although it is just a sum of all cash receipts and expenditures within one’s budget, without the ability not only to earn but also to properly manage personal finances, it is impossible to achieve financial freedom and stability. Human financial behavior is formed based on understanding the value of money and the ability to use it effectively. This allows providing the necessary level of financial security. 

Financial security is a stable financial position of a person in case of force maturity. The feeling of income safety depends on stable earnings, the size of one’s savings, and the ability to achieve financial goals. Important criteria for achieving material security— education, work, savings, and investment. Also, you must remember, that bad credit loans guaranteed approval can lure you into the cycle of debts.

How to Plan Your Personal Finances

Spending everything we earn, financial goals and financial security will remain unattainable. The first step can be sound financial planning and cost control. You should not give up spending altogether, but you should think about which of them are superfluous, without which purchases you can do without.

When deciding whether to buy a certain thing or not, you should ask yourself three questions:

1. Do I really need it?
2. How much money do I have to pay?
3. How easy is it to sell this thing?

Many people find it difficult to estimate how much they need to spend on essential items. Economists advise postponing such decisions for at least 3 days in order to get a better sense of how much you need the item. This is because during this time, you will understand how difficult it is to do without this thing, and make an informed decision. 

Consumer Price Index research has shown that people are likely to spend less when they wait longer to purchase an item. This is because the3-day waiting period allows for a “cooling off” period, during which people have time to consider whether they really need the item. As a result, economists advise that people take their time when making major purchase decisions. By waiting just a few extra days, you can save yourself both money and stress.

When estimating the cost of a purchase, take into account the cost of its maintenance. For example, the purchase of a car worth $ 10,000 does not end with these costs, because then you have to constantly pay for fuel, maintenance, and security. However, when considering the purchase of a car, everyone evaluates not only the material costs of maintaining it but also the intangible benefits of owning a personal vehicle.

Before you start controlling your income and expenses, here are some simple tips to keep in mind:

1. You must have a financial goal. If you do not understand why you spend time controlling your finances, it is very easy to fail. But if you have a goal (put off on vacation, buy a new laptop, pay off debts, etc.), then how and what you spend money has a slightly different meaning.
2. Keep track of every penny you spend. It doesn’t matter what application you use — you need to make it a habit to record your expenses as soon as you buy something.
3. Create a budget. A few weeks or months after you’ve started tracking your spending and gathering enough data, use it to develop a budget to stick to. Divide your income into certain categories (transport, housing, food, entertainment) and try not to spend more on it than you planned.
4. Check your subscriptions. If you use certain services for which a certain amount is deducted from your card every month, at least once a year, analyze whether you need them, and maybe you need to cancel your subscription.
5. Create a contingency fund. Try to set aside a certain amount for the following expenses: treatment, car, or equipment repairs, so as not to break your budget and get into debt.

Audit of Personal Finances

Personal finance management is a process in which an individual achieves financial goals and it is necessary to start with the audit of personal finances. To do this, answer the main question: “Where am I in my relationship with finance?”. For convenience, some use conditional zoning. For example, in the so-called “red zone” your expenses and debts exceed your income, in the “yellow zone” your expenses exceed your income, and in your “green” and “blue” zones, your income far exceeds your expenses.

Red Zone

If you are constantly living on credit, using credit cards, and have time to spend money in the previous month in advance, then be careful — you are in the red zone. This often happens unconsciously, in the paradigm of the psychology of poverty, because for many centuries previous generations have faced financial difficulties, and received the attitude that money is dangerous.

Yellow Zone

Going beyond the red to the yellow zone is a good start, but you’re still wasting your income. At this level of financial thinking, there is no skill to save money. And if there is accumulation, then you spend it and start all over again. In fact, in the “yellow zone”, your income is equal to your expenses. This behavior is due to the lack of a clear planning horizon and defined financial goals.

Green Zone

If your income exceeds expenses and you have an understanding of personal balance, and a clear structure of income/expenses — we can already talk about financial management.

At this level, there is the skill of accumulating money regularly, the ability to use credit as a tool for their benefit, clear financial goals, and a certain planning horizon. So, you can start thinking about a planned investment.

Blue Zone 

When your life goals, values, and priorities, including financial ones, are defined, there is family capital, there are several sources of income and investment experience — congratulations, you are in the “blue zone”! At this level, your capital grows, but there is a question of increasing the number or quality of assets.

How to Define Your Personal Finance Planning Horizon

Here are some key tips and tricks to help you define your personal finance planning horizon for a specific purpose:

1. Goal setting. The basis of the plan is the redistribution of funds, subject to the logic of achieving a conscious goal.
2. This is followed by an assessment of the current financial condition: income and expenses, assets and liabilities, as well as the market situation.
3. Budgeting to achieve this goal will be the next step. By keeping a budget, you will avoid unplanned expenses.
4. Next, you need to control the movement of money and the balance sheet to assess the current financial situation at a certain date.

Thus, careful planning and control over the implementation of goals will help to become a more disciplined, responsible, and focused person.